Chevron (CVX) stock is outperforming the recent August stock market dip. At $160.90 per share as of Aug. 18, CVX stock is down 1.7% from $163.66 at the end of July. Meanwhile, the S&P 500 index ($SPX) is off -4.78% today at $4,369.71 vs. $4,588.96 on July 31.
The reason likely lies in the fact that Chevron has a low forward price/earnings (P/E) multiple of just 12.1x and a high dividend yield (3.78%). This makes CVX attractive to value investors who invest for the long term.
In addition, short-term traders, who sell short out-of-the-money (OTM) put options, find shorting CVX puts suitable for income gains in the near term.
Analysts Still Positive on CVX Stock
Analysts are still quite positive on CVX stock, especially given the rise in oil and gas prices recently. For example, Goldman Sachs recently upgraded its recommendation from Neutral to Buy as well as Mizuho Securities, according to Yahoo! Finance.
In addition, the average CVX stock price target, according to the same site, is $186.68 per share for 25 analysts surveyed by Refinitiv. That implies a potential upside of 16% from today's price of $160.90 per share.
Moreover, the average forward P/E multiple for the past 5 years, excluding 2020 when it was 31x, is 12.6x, according to Morningstar. That is 10.7% higher than its present 11.4x forward multiple for 2024 EPS estimates.
This implies that CVX could still rise between 11% to 16% over the next year, just based on these metrics. One way to play this conservatively is to short out-of-the-money puts.
Shorting OTM Puts for Income
I discussed a recent large short sale of OTM put options by institutional traders in my Aug. 9 article, “Unusual Activity In Chevron Stock Options Implies Good Upside In CVX Stock.” The Barchart Unusual Stock Options Report for that day showed that 10,000 put contracts traded at the $145 strike price for expiration on Oct. 20, 2023. This was 9.80% below the spot price or 9.80% out-of-the-money.
Since the average premium was $1.66, this amounts to a 1.145% yield (i.e., $1.66/$145.00) to those traders in this tranche who sold short the CVX puts. Given that the expiration date was 72 days away, this works out to an annualized yield of 5.725%. This assumes that the trader can repeat this trade at least 5 times a year (i.e., 365/72).
In effect, for shareholders who are long CVX stock, this is a way to enhance the 3.78% dividend yield to 9.51% annually. Today, the put premium at the $145 strike price is lower at $1.30 per put option. This shows that even though CVX stock is lower, traders who sell short OTM puts are making money since the put premium has fallen as well.
Investors can duplicate this trade in a closer expiration period to gain additional income.
Shorting Near-Term Puts
For example, the Sept. 8 expiration option chain shows that the $150 strike price puts trade for 53 cents. This works out to a yield of 35 basis points (i.e., $0.53/$150) for an OTM short-put trader.
Moreover, given that this trade expires within 20 days or three weeks, it could be repeated 17 times a year. That implies that the annualized return is attractive at 5.95% (i.e., 17x 0.35%).
Here is what this means. The trader secures $15,000 in cash and/or margin with the brokerage firm. Then, the trader can enter an order to “Sell to Open” 1 put contract at $150.00 per share for expiration on Sept. 8. The account will immediately receive $53.00. This is 0.35% of the original $15,000 invested with the brokerage firm.
Moreover, since the $150 strike price is well below the spot price of $160.90, i.e., 6.77% out-of-the-money, with just 20 days until expiration, there is a very good likelihood that the short-put trade will fall to $0.00 by Sept. 8 or close to that price.
That makes it a very good way to pick up additional income on top of the annual 3.78% dividend yield. This assumes that the trade also owns shares in CVX stock. But even if not, this can be a way to pick up shares cheaply, assuming the stock falls to $150.00 or lower.
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.
