My highest conviction trade today in the ‘hold forever’ space is Chevron Corporation (CVX)

music selection: “You Call Me A B1tch Like It’s A Bad Thing” — Halestorm

This is part speculative that oil prices are near a bottom.  Either way, Chevron’s downstream assets ensure the company remains profitable at depressed commodity prices.  CVX checks out in the shareholder return area.  Current yield is 4.6% (tasty!) and distributions have increased for 27 consecutive years.  The company also retired 4.4 billion dollars worth of its own stock last year (an extra couple percent yield.)  Long term debt is increasing but not to a troubling level (it is still covered and then some by current assets).  And the company is still profitable even with depressed oil prices, pulling in net income of 2.5 billion last quarter.

I sold CVX150828P00094000 this morning for 2.82 a contract.  The trade will be in force 38 days and yields a very attractive 28.82% annualized.  I hope to get assigned so I can begin writing 10% out of the money covered calls against the position.  That should yield about 2% over the 4.6% dividend yield and 2% share repurchase yield for a total yield around 9 percent before any capital gains from price appreciation as commodity pricing improves.  Paint me a happy lizard.

Devour your prey raptors!

 

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Write Puts on Chevron (CVX)

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7 thoughts on “Write Puts on Chevron (CVX)

  • July 22, 2015 at 5:51 pm
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    Hey Lizard King

    New here! Been thoroughly enjoying your content and also surprised at your aggressive withdraw rate. One thing if you don’t mind clarifying “so I can begin writing 10% out of the money covered calls against the position. ”

    Do you mean 10% of the current price? With CVX at 94, that would be around 103.4. The calls going out this far are very thinly traded with wide bid ask spreads and a delta of 10.

    Reply
    • July 23, 2015 at 12:43 am
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      J W,

      Welcome to the Lizard Life!

      Yes, I’d target the 103 or 104 strike once assigned. I find that even with thinly traded options, the market maker will usually show you some love a little bit on the bid side of the ask if you make an offer. In the unlikely event there is nothing on offer at 104, try 103. Going out of the money isn’t an exact science. You just want to make sure you capture some upside before getting called away. And 10% over about 6 weeks is plenty of upside on an annualized basis. Thanks for reading.

      Reply
  • July 23, 2015 at 1:53 pm
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    Thank you for the clarification. It is taking me some time to devour all the delicious content!

    Apologies if I missed this but do you ever close out of the naked positions should the deltas go against you big time? I know you only sell on the “aristocrats” and do not mind being assigned! But does that hold true in cases where it has severely gone against you? Say $10 ITM?

    Reply
    • July 23, 2015 at 3:38 pm
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      My positions are not “naked” e.g. they are “cash secured”. I do not have to fear a margin call. I’d say 10 bucks ITM is a meaningless measure. A big hit on a 20 dollar issue but a yawner on Google. I could find myself persuaded to close if the investment thesis changes. Say news comes out that the FDA has determined Big Macs cause cancer, contribute to Global Warming, and Make You Gay (silly of course). I’d lose faith in the ability of McD to make cash flow, pay dividends, and retire stock. It would be time to exit the position. This can happen even with the Aristocrats (see Eastman Kodak and Pitney Bowes). But like the Hunger Games, ‘the odds be ever in my favor’.

      What I do sometimes, is if I get assigned on multiple issues and have depleted cash, it write at the money covered calls to exit the positions and replenish cash while earning higher premiums.

      Note that I sometimes write puts on issues outside the Aristocrats. Dividends should be only part of your analysis of shareholder return. A long history of debt repayment and/or share repurchases are just as good. And growing cash flow without returning to shareholders can also be good if the company is accumulating useful assets. Don’t drink the DGI Kool-Aid. It is sweet but empty of nutrition.

      I’d also say keep in mind the bull market will eventually end. There will come a time when falling prices deplete cash and leave you resigned to a couple years of depressed returns. In the words of Douglas Adams “Don’t Panic.”

      Reply
  • July 24, 2015 at 10:29 pm
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    Hi LK, what’s your opinion on “oil prices are near a bottom”? I am long CVX aggressively. But the big oils’ prices slide really deeply nowadays and seem no bottom.

    Also, CVX will report earnings on 07/31. With this put writing, do you believe the earnings result will be better than expected?

    Reply
    • July 24, 2015 at 11:13 pm
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      MU, the swing barrel producers are the highly leveraged shale oil producers. Best I can tell, they have a breakeven around 55 to 60 a bbl. So there is a supply constraint at that level. Prices can go lower temporarily because drilling costs are sunk so the swing barrel producers will continue to pump at a loss in hopes of making interest payments and surviving the cycle. We’ve already seen several big shale bankruptcies. More are coming. But oil can’t go lower without forcing the majors to cut capex further as well. Thus, it is a matter of just a few months while short lived shale oil assets deplete to impaired production levels.

      CVX is a long term play. A hold ‘forever’ stock. I’m not concerned in the least about the current quarter’s results. What matters is that CVX is attractively priced for long term out performance. The put is just to pick up some easy money while I wait.

      Reply
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