Chevron (CVX) has an attractive 3.89% dividend yield and at $154.80 in early trading on July 18 it is cheap at 11.5x earnings. This makes CVX stock popular with value investors as well as traders who short out-of-the-money (OTM) puts.
Moreover, analysts still forecast strong cash flow and earnings for the company. For example, 24 analysts forecast that its Dec. 2023 earnings per share (EPS) will reach $13.27 per share. Barchart's survey of 9 analysts shows average EPS forecasts of $13.75. That puts CVX stock on a forward price/earnings (P/E) multiple of just 11.3x earnings.
And next year Seeking Alpha shows an average of forecast $13.50 in EPS, and Barchart shows an EPS of $15.06. Taking an average of $14.28 puts CVX on a cheap P/E of just 10.8x.
Short Put Trading Works for CVX Stock
We discussed this situation in our article on June 26, “Chevron Stock Still Looks Like A Great Buy To Value Investors.” At the time the stock was at $154.15, so it has essentially tread water since then. But we suggested that is ideal for traders who sell short its OTM puts.
For example, at the time the July 21 $147.00 strike price puts, which were 4% below the stock price, were trading for $1.00 per put contract. That gave traders an immediate yield of 0.68% for just 3 weeks until expiration.
Today those put options are trading for just 4 cents and will likely expire worthless on Friday. That shows that this was a successful trade, especially since CVX stock stayed flat.
In fact, if the trader can repeat this trade every 3 weeks, the annualized return is worth 11.56%. This is because there are over 17 periods of 3 weeks in a year, so 17x 0.68% equals 11.56%.
Shorting OTM Puts for Aug. 11, 2023
Traders might be willing now to close out the prior short put trade by buying it back through entering an order to “Buy to Close” the July 21, 2023, $147.00 put options. This frees up capital and margin to enter into another short put trade.
For example, the Aug. 11 expiration $145.00 puts trade for 89 cents today. This strike price is over 6% below today's price. That gives traders an immediate yield of 0.61% (i.e., $0.89/$145.00).
For more enterprising investors, willing to take on more risk, the $150 strike price puts expiring Aug. 11 trade at $1.89 per put contract. That gives the trader an immediate 1.26% yield (i.e., $1.89/$150.00).
For example, assuming the trader secures $14,500 with their brokerage firm, they can enter an order to “Sell to Open” 1 put contract at $145.00. The account will then receive $89.00. That is why the yield is 0.61% since $89/$14,500 is 0.61%.
Moreover, the trader who secures $15,000 with their brokerage firm can short the $150 strike price put and receive $181. That $181 works out to 1.26% of the $15,000 secured with the brokerage firm. This strike price is just 3.2% below today's price.
As a result, traders might do a mix of both the $145 and $150 strike price puts to weigh the average strike price and yield that suits their risk preference. Keep in mind that if the stock falls from here these trades may be exercised. That means that the cash secured with the brokerage firm will be used to buy 100 shares of CVX stock at the strike prices where it was sold short.
Nevertheless, the bottom line is that if CVX stock stays relatively flat over the next several weeks, traders can make good money shorting its OTM puts. Moreover, given how cheap the stock really is now, there is every reason to believe that the next move will be for CVX stock to rise.
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.
