Use Puts To Buy These Value Stocks: NVIDIA Corporation (NVDA), Cisco Systems, Inc. (CSCO), The Western Union Company (WU)

The Western Union Company (NYSE:WU) – The Western Union Company (NYSE:WU) is the king of the money transfer industry, and when I wrote about the company here I valued the stock at $19 per share at the high end, compared to a current share price of about $14. The Western Union Company (NYSE:WU) operates in an industry where size matters because most of the costs are fixed. With annual FCF around $1 billion, about 16% of revenue, The Western Union Company (NYSE:WU) is the 800 lb. gorilla of the money transfer business. Another big plus is a solid dividend yield of 3.43%, which increased by 25% in December of 2012.

If you want to buy the stock then you can sell the April $14 put option. This is barely below the current share price, and if the stock drops below $14 your effective purchase price will be $13.55 per share with the $20 premium. If the option expires worthless your return is 1.4% in 38 days.

If you want to generate income then you can sell the May $13 put option. This option gives your a 10.3% buffer against a stock decline and the $20 premium represents a 1.5% return over 73 days, or 8.5% annualized.

Another option is the May $12 put option. This gives you a bigger buffer of about 17% against a price decline while reducing your annualized return to 4.6%.

The Bottom Line

Selling put options on undervalued stocks is a conservative way to either set the purchase price and receive a premium to wait for the stock price to fall or to generate income. Even if the stock is put to you you’re buying a quality company at a discount to its intrinsic value. If the options expire worthless you can easily generate a double-digit annualized return. It’s a win-win.

The article Use Puts To Buy These Value Stocks originally appeared on Fool.com and is written by Timothy Green.

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