Occidental Petroleum (OXY) stock has mirrored the recent rise in oil futures, as seen in the June 26 WTI futures contract. One profitable way to play it is to sell short out-of-the-money (OTM) OXY put options for one-month expiry.
OXY closed at $56.84 on Thursday, May 14, up over 1.1%. It has also risen from a recent low of $53.03 on May 8, and a 3-month trough of $45.49 on Feb. 12. However, OXY is still well below its 3-month peak of $66.24 on March 30, just before the Iran war.
Nevertheless, oil futures are up again to over $101 per barrel. If this persists, it could help push OXY stock higher.
How This Worked Out Last Month
I discussed buying OXY stock and/ or shorting OTM puts three weeks ago in an April 20 Barchart article, “Occidental Petroleum Stock Is Off Its Peak - Time to Buy OXY or Short OTM Puts?”
At the time, OXY was at $53.79, and I discussed either buying OXY stock or shorting one-month puts at a lower strike price. For example, at the time, the May 22 expiry $50.00 put option had a midpoint premium of 97 cents. That strike price was 7% below the trading price (i.e., “out-of-the-money”).
That provided an immediate yield of 1.94% to the short-seller (i.e., $0.97/$50.00 = 0.0194), and a breakeven point of $50-$0.97, or $49.03.
This has already worked out well, as the midpoint premium is only 4 cents today. That means an investor could close this play out by entering an order to “Buy to Close” this put option.
New Short-Put Plays
The June 18 expiration period shows that the $52.50 put option strike price has a midpoint premium of 88 cents. That works out to a short-put yield of 1.67% (i.e., $0.88/$52.50) for the next month for a strike price that is over 7.6% below Thursday's close.
However, some investors may be willing to take on more risk that their play will be assigned, i.e., they will be forced to buy OXY shares at a lower strike price. For example, the June 18 expiry $55.00 strike price has a much higher yield (3.1%), with a low breakeven point:
$1.71 / $55.00 = 0.031 = 3.1% one-month yield
$55.00 - $1.71 = $53.29, i.e., -6.25% below the May 14 closing price of $56.84
Averaging Both Plays and Downside Risks
The point is that an investor who can do both of these trades will have a good yield and low breakeven. The average yield will be:
$88 +171 = $259 / ($5,250 +$5,550) = $259/$10,750 collateral = 0.02409 = 2.41% one-month yield
Moreover, the average delta ratio (i.e., the chance of having the account assigned to buy shares) is only 0.289, i.e., less than 29% (below a ⅓ chance).
That shows that this is a good potential play for investors in OXY stock. Even if OXY falls to the average price of $53.74 (i.e., -5.4%), the investor makes a good yield, and has a lower breakeven point (B/E):
$10,750 - $259 = $10,491/200 shares = $52.46 B/E
That B/E is 7.7% below Thursday's close, making it an attractive potential buy-in point for value investors.
The risk is that OXY falls below that price, but this would still only result in an unrealized capital loss. There are ways to mitigate this downside, by shorting OTM calls, rolling the trade over to a new calendar point, and shorting new OTM puts.
The bottom line is that shorting OXY puts at close or out-of-the-money (OTM) strike prices is a potentially profitable play for value investors.
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.
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