Occidental Petroleum (OXY) hiked its annual dividend per share (DPS) by 9% dividend hike last month. That has helped make OXY stock an analyst favorite - cheap based on their price targets. Shorting out-of-the-money puts can provide extra income and set a lower buy-in target price.
OXY is trading at $47.19 in midday trading today, up from a low of $45.51 on March 5. With its new annual 96 cents DPS announced on Feb. 18, OXY has a dividend yield of 2.0%, making it very attractive to value investors and analysts.
I discussed this in a recent Barchart article on Jan. 24: “Occidental Petroleum May Hike Its Dividend Next Month - OXY Stock Could Rise 22%.” For example, 28 analysts surveyed by Yahoo! Finance now have price targets of $59.86 per share, and Barchart's survey has a mean target of $60.29.
Moreover, AnaChart.com's survey shows an average of $56.53 from 21 analysts who have recently written about OXY. This could mean an upside of +25% upside in OXY stock if it rises to an average of $58.89.
Average Yield Price Target
OXY stock has had an average dividend yield of 1.62% over the past 3 years. This is based on data from Morningstar for OXY's annual dividend yield. Moreover, Seeking Alpha shows that its average 4-year average yield has been much lower at 0.81%.
Just to be conservative, let's assume that over the next 12 months, OXY stock could average a slightly higher 1.65% dividend yield. What would the target price have to be?
To calculate this, take the annual dividend per share (DPS) and divide it by 1.65%:
$0.96 DPS / 0.0165 = $58.18
That is over $10 higher than today's price and implies an upside of +23.2% for investors. This assumes that on average OXY stock trades with a 1.65% average yield over the next 12 months. But there is no guarantee this could happen.
One way to play this, to gain extra income and set a lower buy-in price target, is to sell short out-of-the-money (OTM) put options in nearby expiry periods.
Shorting OTM Puts for Income and Buy-In Target
For example, look at the April 4 expiry period for the $45.00 put option strike (i.e., exercise) price, 4.8% below today's trading price. This out-of-the-money (OTM) strike price has a midpoint premium of 88 cents.
That can provide a lower buy-in target price for short sellers. In addition, the premium offers a short-seller of these puts an immediate yield of almost 2.0% (i.e., $0.88/$45.00 = 0.01955 = 1.9555%).
In other words, an investor who secures $4,500 in cash or buying power with their brokerage firm can enter an order to “Sell to Open” 1 put contract at $45.00 and their account will receive $88.00.
That is why the yield is 1.955% since $88 / $4,500 invested equals 0.0.1955. This means that as long as OXY stock stays over $45.00 for the next 25 days (until April 4), the secured cash will not be used as collateral to buy 100 shares at $45.00.
But even if that happens, keep in mind that the investor's net investment is only $4,412 (i.e., $4,500 - $88.00). That means that the average cost for these 100 shares is only $44.12, or 6.47% below today's price.
Moreover, the investor stands to make an annual dividend yield of 2.18% (i.e., $0.96/$44.12) based on this breakeven price.
However, investors have risks here. They should go to the Barchart Learning Center and specifically, the Options Trading Risk and Put Options Explained sections. For example, if OXY falls below $45.00 and the short-put options play is assigned, the investor could end up with an unrealized capital loss.
The bottom line is that this is one way to generate extra income in OXY stock for existing investors, and a way to get paid while waiting to buy in at a lower price for others.
