Options Ideas 9/14/2020

This article should be used in conjunction with the Stocks of the Week article for the same date.

Option Opportunities

Selling cash-secured puts on any of the stocks in the “Stocks You Can Buy” section is always a possibility. High volatility to the downside, presuming our thesis isn’t broken is always good for premium. 

Generally speaking, I like to sell puts on growth stocks and just buy the dividend stocks when they come to me. There are exceptions of course, like when I already own some shares. 

When selling cash-secured puts, remember to consider your asset allocation already to a stock. Don’t ever leave yourself hanging with a potential more than double position. 

If you already own a stock, sell your puts a bit outside the money. If you want the stock assigned to you, but just with a net lower price, then sell your puts at the money to collect the time value on the premium. 

For KMI and T I think you can sell December puts. I’d probably just buy the stocks though at these prices. 

For Lam Research, puts are tough to sell because of the high share price. Likely you just have to wait for it to come down a bit more and then buy. 

Analog Devices probably falls in the same category as Lam, but for six and seven figure accounts, I like the December 100s. 

Unfortunately, with Itron, there just isn’t much option activity just yet. I’d wait for my price. 

Selling covered calls on almost anything into the election season makes sense to me. I find it extremely likely we get at least a small correction by year-end and you know I think it likely is worse than that. Keep nickel and diming on premiums. I like December and January covered calls. 

Managing Oil Stock Hedges

The reason I am a bit short the oil stocks is because their business model sucks and it’s the most likely place to see more selling into year-end. Why is that? 

  • tax-loss selling.
  • OPEC and BP (BP) telling us this week oil demand was not rebounding fast and maybe not at all. In fact, BP said that 2019 oil demand might have been the peak (I think we match it in 2023 and rise a bit higher to 2025, but then it’s downhill – presuming a vaccine). 
  • Shale is doomed with Saudi Arabia and the rest of OPEC saying their done with cuts. Remember how many times I’ve said that the low priced OPEC producers would no longer subsidize more expensive shale producers. 

I continue to hold puts on Exxon (XOM), Continental Resources (CLR), Occidental Petroleum (OXY) and Devon Energy (DVN). I’m not sure any go bankrupt, but I think all three shale stocks go to penny status. Exxon is heading to about $30 soon and I think ultimately around $10 prior to a break-up. 

Continental January $12.50 or $10 puts are reasonable.

Occidental January $10 puts are reasonable. 

Devon is interesting. I own the January $10.74 puts. That has to do with the Barnett Shale spin-off. The special dividend is part of the big skim rip-off. This company has no business buying back shares or paying a dividend. Just another of the jokes from: 

Shale Oil’s Final Theft From Shareholders

Somebody owns January $5 puts. Maybe that’s where to go. Hard to know. I hate to tell you make a market in a new issue. Maybe stay away from Devon for now. 

I own January $40 and $42.50 puts on Exxon (XOM). Both are profitable as I bought when Exxon was about $43 per share. If you want to speculate on really bad news regarding the dividend, I’d buy the $30 puts for April. A bit more pricey for time value, but hard to know when they announce the dividend cut. So long as they cut by winter, you’re in good shape. 

To be clear, there’s no ethical reason that Exxon doesn’t cut the dividend. They can play shenanigans longer, but I think they are at the point they have the cover to give up the ghost. It’s just a matter of before or after the election in my opinion. Not sure it matters to them, but maybe it does.

Disclosure: I am/we are short xom, CLR, OXY, DVN.