Suncor Energy (SU) has a high 4.8% dividend yield and a low earnings multiple. This makes the stock attractive to value investors. It has also made shorting puts and calls popular with these investors.
For example, last month in our article “Suncor Energy's 4.35% Yield And Buybacks Are Drawing Option Income Investors,” we discussed shorting calls and puts for the period expiring April 6. The calls were out-of-the-money (OTM) at a strike price of $39.00 and SU closed yesterday at $32.00, so the call option income earned was completely free. This was because the shorted call option expired worthless as the contract was not exercised. The covered call investor made a 0.56% yield based on the 20 cents premium price.
Moreover, the put strike price of $31.00 also ended up out of the money. This means that investors made the shorted premium income without having to buy shares at $31.00 if the options were held to expiration. The short put investor made a 0.645% yield based on the 20 cents premium shorted at the $31.00 strike price.
However, investors should be clear that the oil and gas company pays a variable dividend. This could affect the stock's dividend yield, based on the upcoming earnings for Q1, which is likely to show lower earnings.
Nevertheless, SU stock is very cheap. It trades for just 7x earnings based on analysts' earnings estimates for 2023. Assuming the stock still pays out 38.22 cents per share in dividends per quarter, the dividend yield is now very attractive at 4.83%.
Shorting OTM Calls and Puts with SU Stock
The same trades can probably be done again with similar results. For example, for the expiration period ending May 5, an investor can short a covered call at $35.00. This strike price, which is almost 11% above today's price, has a midpoint premium call price of 19 cents. That works out to a covered call yield of 0.60%, or 7.2% if this trade can be repeated every month for a year.
The above chain shows that an investor who buys 100 shares of SU stock at $31.61 for $3,161 can then enter in an order to “Sell to Open” 1 call contract at $35.00 expiring May 5. The account will immediately receive $19.00, which effectively lowers the buy-in cost to $31.42 per share.
As a result, the investor gets to earn a dividend yield of 4.87%, assuming the quarterly payment of 38.22 cents continues over the next 12 months. This is likely why this particular call option has a large number of contracts outstanding, 260, as of April 7, showing its popularity with income investors.
Moreover, investors can also make good money shorting OTM puts with this same expiration period. For example, the $28.00 strike price put, which is over 11.4% below today's price, trades for 20 cents. That implies that the investor can make a short put yield of 0.714%.
For example, an investor who secures $2,800 with the investment brokerage firm can then enter an order to “Sell to Open” 1 put contract at $28.00. The account will immediately receive $20 per put contract shorted. This works out to an annualized yield of 8.57% (i.e., ($20 x 12)/$2,800) if the trade can be repeated each month for a year.
The bottom line is that investors can make good money shorting Suncor Energy's out-of-the-money calls and puts going forward.
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.
