Using an easy to understand options strategy, you can purchase this undervalued and attractive stock at a 10% discount to its current price or get paid real cash income not to. Professional money managers use this strategy to build positions in stocks at a discount while also earning a regular income stream.
Rates are ridiculously low with the benchmark U.S. Ten Year Note stuck at 1.5%. Not only is the annual return anemic but it ties up funds for a decade at that low, low, rate. I don’t think any investors desire those low returns that won’t even cover the cost of inflation, so I want to share a simple strategy for generating income every month using options.
This strategy is a variation on the widely utilized covered call strategy that has the exactly same risk profile and can be used every expiration month to generate near 5% income every month with a 70%+ probability of profit.
The fundamental fact of record American energy production knocked oil and gas prices down hard over the last two years. Extreme lows in crude oil prices at $30 a barrel bounced higher only to stall near the $50 level.
Labor Day weekend will see millions fill up the tank for that end of season vacation road trip for some sun and fun.
A summer crude correction, declining to $40 in early August, saw renewed fallout fears to spike volatility (opportunity for traders). The heightened uncertainty has created a “WIN-WIN” situation on energy companies to either buy their stocks at a 10% discount or get paid not to.
Whiting Petroleum (NYSE: WLL), is a Denver, Colorado based firm that engages in oil and gas exploration. The Rocky Mountain area, including North Dakota, combined with Texas has reserves of 820 million barrels of oil equivalent (MMBOE) that Whiting can tap into.
Whiting Petroleum was an $80 stock when crude traded at triple-digit prices in 2014 but has now fallen to under $10 per share.
WLL bounced from an extreme low of under $4 to $14 in June. The trade seems to gravitate to the $8 price pivot that developed since the beginning of 2016.
Note that Whiting Petroleum closed below $7 only twice since the beginning of March.
IT IS ALL ABOUT THE MATH
The option volatility at the 75% level makes the option expensive in relative value compared to the market itself. Option selling strategies take advantage of the increased premiums.
The potential return on risk of 4.5% in a month is attractive with a $6.70 breakeven at the option expiration.
Buying at a 10% discount to the price if shares are assigned is a way to position your portfolio for a long-term recovery in a single-digit stock or to get paid not to buy it at these extremely low levels.
The high implied volatility makes option selling strategies attractive as pure probability trades that utilize time decay acceleration. The September options have three weeks until expiration.
This tactic to buy at a lower price, or get paid not to, is used by money managers to buy stocks they WANT for lon- term portfolio positioning. You can use the fear of other investors for your benefit by selling a CASH SECURED PUT to enter the stock at a major discount.
The fear and uncertainty can be used to get in another 10% lower for those who at worst are comfortable holding on to an inexpensive stock to wait for a potential recovery.
The straightforward Price Order to buy a stock at a discount is common if it can be determined at what price it is comfortable to purchase shares. Put in the trade at “X” and wait for the dip to enter.
Professional money managers have certain points at which they would buy a desirable stock, and an option strategy lets them get in at discount or get paid not to.
Selling a CASH SECURED put has the same mathematical risk profile as a covered call and would assign the stock long at the option strike price. The true entry basis is actually even lower with the subtraction of the premium.
With the Put sale, there is an OBLIGATION to buy at the strike price if it is assigned.
However, if the stock is not below the strike at expiration the premium received is all profit. Get in the stock at a discount or get paid not to…
Trade Setup: Sell the WLL September $7.00 Puts to open at $0.30 or better. The cash secured Put sale would assign long shares at $6.70 if it is put to you costing $670 per option sold.
The combination of time decay and 75% probability of WLL finishing above the $6.70 break even make the option sale attractive with just three weeks until expiration.
If WLL stock does move lower, buy the shares for 10% cheaper than the current share price. In the event that shares are assigned at $6.70 basis, an October covered call can be sold against the stock to lower the cost basis again when you own it.
Otherwise, you get paid not to… and get a 4.5% return in three weeks.
If you’re interested in consistently finding income opportunities stocks like the one above, you can join a community of readers who use a unique tool my colleague Tim Plaehn developed called the Monthly Dividend Paycheck Calendar. We’ve been using it for a few years now to deliver a steady stream of monthly income for investors from safe, high-yield stocks. And unlike what the scare mongers out there offer, the Monthly Dividend Paycheck Calendar offers you a real solution whether you’re just looking for extra income or trying to make up for lost time.