Chevron Corp (CVX) stock is down slightly in the last month to $159.22 as of March 28. But investors can still take advantage of its high out-of-the-money put option premiums by shorting them for income and to reduce buy-in costs.
Oil prices have slowly started to reach a recent bottom here after falling for much of Q1. Analysts expect that earnings for Q1 for Chevron will be lower. But this is mostly in the stock price now.
Moreover, CVX stock now has an attractive dividend yield of 3.79% based on its annual $6.04 dividend per share. As I wrote in my recent article on Feb. 27, CVX stock is not that expensive at just a 10.6x earnings multiple for 2023 and 10.8x for 2024. For example, this is the lowest multiple it has been at in the last 5 to 6 years, and well below the 16x average during that time.
Shorting Out-of-the-Money Puts for Income and to Reduce Costs
As a result, investors are looking to gain additional income by shorting out-of-the-money puts. This will also help to lower the investor's average buy-in cost, especially if the short-put trades are repeated each month.
Last month we discussed shorting the $140 strike price put for expiration on March 31. The strike price was 13% below the spot price. The put premium received was 50 cents for a 35.7 basis point yield or 4.28% on an annualized basis. As of today that put is nearly worthless, meaning that the investor has kept all the premium shorted.
Now, looking at the April 28 put option chain, we can see that the same $140 strike price put trades for a higher price of 86 cents, although the strike price is only 12% below today's spot price. Nevertheless, this looks like a good trade as well.
For example, the investor who secures $14,000 in cash and/or margin with the brokerage firm can then enter an order to “Sell to Open” a put option at the $140 strike price. The account will immediately receive $86, giving the investor a 0.614% yield over the next month. that works out to an annualized return of 7.37% if it can be repeated over the next 12 months.
This shows that the investor can still make good money shorting out-of-the-money puts, and also lower their average buy-in cost. This is done by repeating this short put trade while holding the stock over the long run.
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.
