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Written Put SM Energy Company (SM)

I’m going with a tip from old oilfield services industry contacts.

music selection:  “Passenger” — Deftones

SM Energy is a shale drilling company that has struggled under the falling price of oil.  I have a tip that they have nearly completed a reinvention of the company.  Underperforming assets have been sold and premium acreage in the Permian basin has been purchased.  Debt has been reduced and all maturities have been rolled out past 2021.  The company has sufficient liquidity to drill its high performing Permian assets and should return to profitability in Q2.  It also offers sweet options premiums.

I sold SM170519P00022500 for 1.00 a share.  The trade will be in force for 18 days and yields an impressive 90.12% on an annualized basis while enjoying 5.58% downside protection.  I sold 5 contracts so picked up a clean 500 before commissions.

This one will require tight monitoring as it will be very sensitive to movements in the price of oil.  The Permian acreage should be profitable down to about 35 dollars a barrel though so I’m not overly concerned about a pullback.

Devour your prey raptors!

 

{ 7 comments… add one }
  • Chris B May 3, 2017, 9:52 pm

    If you’d like to buy an offsetting put, check out COST. It seems somebody’s computers have not been programmed with data about their pending $7 special dividend. June 2 ATM puts are only $3.70.

    • The Lizard King May 3, 2017, 10:31 pm

      Thanks for the tip!

    • Steve May 4, 2017, 12:24 pm

      It’s my understanding that strike prices on options are adjusted after special dividends pay out. This article from 2012 discusses this exact situation with COST back then:

      https://www.fool.com/investing/options/2012/12/18/how-special-dividends-can-sink-options-investors.aspx

      • Chris B May 4, 2017, 1:29 pm

        Thanks Steve! That explains it and I’ve learned something today. I wish the article had gone into more detail about the timing of such an adjustment. I assume the adjustment is made at the dividend payout date, because in COST’s situation, it hasn’t happened yet.

      • The Lizard King May 4, 2017, 5:58 pm

        That is absolutely right. I had forgotten about this quirk that applies to special distributions but not regular distributions. Thanks for reminding everyone!

  • Chris B May 6, 2017, 3:13 am

    What are your thoughts on playing the “death of physical retail” theme by buying leap puts in a portfolio of mall REITs and selling leap puts in a portfolio of non-retail REITs?

    • The Lizard King May 6, 2017, 1:06 pm

      Chris, That is an interesting theme. I think GGP is a real dog that can be successfully shorted. I haven’t checked the pricing on puts though. Might be a good candidate for synthetic shorting. If I was going to sell puts on non-retail REITs, I’d do 1-2 month expiries instead of the LEAPs. There is more rapid time value decay that way.

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