A month ago, Nasdaq, Inc. (NDAQ) reported strong free cash flow and a +13% dividend hike. Since then, NDAQ stock is up as we recommended in a prior Barchart article. One way to play is to Short out-of-the-money put options. That provides a lower buy-in target as well as extra income.

NDAQ is at $82.05 in midday trading on Monday, May 19. This is up from a recent low of $66.40 on April 8, but below its 6-month peak of $83.76 on Feb. 6.

Dividend Yield-Based Price Target

In an April 25 Barchart article, I showed that NDAQ stock could be worth between $83 (median price) and $90 (mean) per share ("Nasdaq Inc Reports Massive Free Cash Flow and a 13% Dividend Hike - NDAQ Stock Looks Cheap").

For example, right now, NDAQ has a 1.316% annual yield with its $1.08 dividend per share (DPS). This is below its average yield over the past 5 years, according to the Yahoo! Finance statistics page (i.e., 1.34%). Similarly, Morningstar says its average has been 1.32% over the last 5 years.

So, using a 1.33% average, here is what NDAQ is worth:

  $1.08 DPS / 0.0133 = $81.20 target price

So, based on that divided yield metric, NDAQ is slightly overvalued.

P/E Based Price Target

Another way to value NDAQ is to use its historical forward price/earnings (P/E) multiples. For example, Seeking Alpha says its average forward P/E multiple has been 22.79x over the last 5 years. Similarly, Morningstar's forward multiple average is 22.3x, for an average multiple of 22.55x

Here's how we can use that. Analysts expect earnings per share (EPS) this year will be $5.04. Using the average multiple, here is the price target:

   $5.04 EPS x 22.55 = $113.65 target

Moreover, the estimate for 2026 is $5.38 EPS (i.e., $5.21 EPS run rate over the next 12 months (NTM)). So, using that average, the price target is:

   $5.21 NTM EPS x 22.55 forward P/E = $117.49 target

Therefore, NDAQ is worth somewhere between $113.65 and $117.49, or about $115.57.

In sum, averaging these two price targets ($81.20 dividend yield, $115.57 P/E based), NDAQ looks to be worth $98.35 per share. That still provides a +20% potential upside:

  $98.35 / $82.06 today = 1.1985 -1 = +19.9%

However, there is no guarantee this will happen in a straight line, if at all, over the next 12 months.

One way to play this, to set a lower buy-in target, is to sell out-of-the-money (OTM) put options in nearby expiry periods.

Shorting OTM Puts

For example, look at the June 20 expiration period, one month from now - i.e., 32 days to expiry (DTE). It shows that the $77.50 strike price put option has a 60-cent midpoint premium.

That strike price is over 5% below today's price - i.e., out-of-the-money. That means the stock has to fall over 5% before a short-seller's account would be assigned to buy the shares at $77.50.

Meanwhile, the short seller makes an immediate yield of 0.77% (i.e., $0.60/$77.50).

That is not a great yield, but at least it shows that the investor can get paid while waiting to buy in at a lower price.

It also means that even if NDAQ falls to $77.50, the breakeven point for the investor is lower at $76.90 (i.e., $77.50 - $0.60), or 6.4% below today's price.

Note that there is a low probability of this occurring over the next month. The delta ratio is less than 19% (-0.18566), showing that based on past trading patterns, there is a low probability of NDAQ falling to $77.50 in 32 days.

The bottom line is that NDAQ still looks cheap here, and shorting OTM puts might be a good way to play the stock for investors.  Moreover, existing investors can make extra income and potentially lower their overall cost basis by shorting these OTM puts.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.