Armchair Guru Advice: How To Get 11%-Plus Yields While You Wait To Buy Ambarella And Seadrill Matthew Schifrin, 12.10.2014

Robert Krebs
Age: 62
Orange County, Calif.
Day Job: Retired Microchip Architect; novelist
Strategy: Selling options for income
Ten-year average Return: 19%
Top Picks: Sell May 2015 AMBA puts; Sell Jan. 2017 SDRL puts

Among the regulars on stock-discussion message board, few command the attention of Bob Krebs (known online as dig4value), especially when he’s talking generating income by selling put and call options, covered by either cash or the underlying stocks, respectively. Until his recent retirement Krebs spent the bulk of his career as an engineer in California’s technology business. He is a devout Christian who, with his wife, homeschooled their now college-aged daughters. He recently wrote the mystery novel C.R.I.M.S.O.N., which he self-published via Amazon. During his 40-plus-year career, he has dabbled in a host of different investments, including buying and renting single-family homes and tech stocks, but now his focus is on generating investment income primarily by actively trading stock options.

Strategy: Krebs looks to earn an extra 1% to 2% per month on his portfolio by selling out-of-the-money calls and puts, often against his stocks. This strategy, which earns income from options premiums that expire worthless, is often employed by sophisticated hedge funds and is also available in so–called buy-write funds like Eaton Vance’s Tax-Managed Buy-Write Opportunities Fund (ETV). The tactic has afforded Krebs excellent returns, despite a relatively high cash position in his portfolio (currently 50%). At any given time Krebs has 70 or so options positions open.

Best Ideas: Sell the May 2015 AMBA puts with a $40 strike price at about $2.75. “I think it is a very safe play in that it is unlikely AMBA will fall into the 30s,” says Krebs of Santa Clara’s Ambarella AMBA +0.9% (AMBA, 51), which makes the video chips for GoPro and other cameras has a very strong earnings outlook. “It will give you a 14% annualized return against the strike price.”

For a more speculative play, Krebs recommends selling the long–dated put options of offshore driller Seadrill (SDRL, 12). Specifically, its Jan. 2017 puts with a strike price of $8, which were recently selling at $2.20 per contract. This will effectively get you into SDRL, currently trading at $11.57, at just over $6 per share. “It is a very long–dated put, and yet you net about 11% a year over the next two years against the strike price. Will SDRL fall to $6 a share? I guess it depends on how far oil will fall,” says Krebs.–Matt Schifrin

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