Chevron (CVX) stock has been rising, up $2.85 on Monday, June 26, to $154.15 along with higher prices of oil and gas this weekend. The 3.90% CVX stock dividend yield and its massive buybacks are attractive to value buyers, including short-put traders.
I discussed this in my June 2 article, “Chevron Attracts Value Buyers And Short Sellers Of Its Out-Of-The-Money Puts For Extra Income," and my May 19 article, “Chevron Stock Is Off Since Its Q1 Earnings, But Its 3.92% Yield And Low P/E Make It Attractive.”
CVX Treading Water Perfect for Shorting OTM Puts
At the time of the June 2 article, CVX stock was at $152.16 and as of May 18, it was at $154.01. So, since then CVX stock has been treading water ($154.15 today), which is perfect for shorting out-of-the-money (OTM) put options.
This is because that means they eventually expire worthless, allowing the short-put trader to not only keep the income earned. It also frees them from any obligation to buy the shares at the lower OTM strike prices.
For example, in the June 2 article, the $140 strike price puts expiring June 30 were originally trading for 98 cents at the time of the article. That provided the short-put trader with an immediate income yield of 0.70% (i.e., $0.98/$140). As of today, June 26, those puts are now trading for just 1 or 2 cents, or almost worthless.
If repeated each month that works out to an annual return of 8.4%. So if the trader also owns CVX stock on a long basis, this provides additional income on top of the 3.90% dividend yield.
It also means that an investor might want to close out these puts by entering in an order to “But to Close” the short put trade. Then the investor is free with the same cash and/or margin to roll the trade over to a new trade.
Shorting July 21 CVX Puts
For example, the July 21 put option chain shows that the $147.00 strike price puts have an attractive $1.00 premium. That works out to an immediate yield of 0.68%, which is almost equal to the prior yield mentioned above at the $140 strike price.
This means that a trader who secures $14,700 in cash and/or margin with their brokerage firm can enter an order to “Sell to Open” 1 put option at the $147.00 strike price. The account will immediately receive $100. That is why this trade has an immediate yield of 0.68% (i.e., $100/$14,700 = 0.68%).
Moreover, if the investor can repeat this trade each month it works out to an annualized return of 8.16%. This is an attractive addition to the 3.90% dividend yield that a long investor in CVX stock enjoys.
Note that this strike price is just 4.60% below today's spot price, but the earlier June 30 strike price put trade had an OTM strike price that was 8.0% below the spot price at the time. So, that makes this trade a bit more risky. That is, there is a higher possibility that if the stock falls to $147.00 on or before July 21, the investor will have to use the $14,700 they secured to purchase 100 shares at $147.00.
That could result in a potential unrealized loss in the position holding. Or it could also lower the investor's long-term average cost in the stock. In any case, all is not lost. This is because if need be the investor can turn around and sell an out-of-the-money covered call option to create more income.
That will help lower the potential unrealized loss position in CVX stock. This is known as a “wheel” strategy since the investor has gone 360 degrees from being shorting a put to shorting a call - all based on the same investment funds.
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.
