The Stock Option Writer
© Warren Kaplan 2011-2012
July 10, 2012
Once the darling of income-seeking money, the Canadian oil trusts were destroyed by Jim Flaherty, Canada’s idiot former minister of finance by forcing trust holders to convert to corporate status and pay corporate taxes thereby reducing the amount of dividends that shareholders received. This happened in late 2011. It was of course a terrible decision and Flaherty was soundly voted out of office. Well, the stock prices of the trusts collapsed and today they are just corporate businesses, not forced to pay out the dividends that the trusts were. However, although the rates of the dividends have been reduced, they are still paying out. Most of them pay quarterly but a few have continued the policy of paying monthly. Enerplus (ERF) pays monthly. This stock once sold as high as $45 but now is available for $13.46 or less. Of course the dividend is a lot less than it used to be. The company produces a lot of gas and so it has been punished because of the really low price that gas currently brings.
“Enerplus Corporation, together with subsidiaries, engages in the exploration and development of crude oil and natural gas in United States and Canada. As of December 31, 2011, it had 322 MMBOE of proved plus probable reserves. The company also held a portfolio of approximately 380,000 net acres of land comprised of 75,000 net acres at Fort Berthold targeting the Bakken and Three Forks; 65,000 net acres in the Duvernay; 33,000 net acres in the Montney; 67,000 net acres in the Stacked Mannville; 30,000 net acres in the Cardium and other emerging oil plays in Canada; and 110,000 net acres in the Marcellus. In addition, it had 120 gross producing wells. The company was founded in 1986 and is headquartered in Calgary, Canada.” This is a summary from the Yahoo site.
If you own ERF, your dividend depends on management rather than what the company earns. It should be noted that this company paid monthly dividends even during the terrible days of 2008-09. The current monthly dividend has been reduced to $.087 U.S. per share. The current annual yield is 7.77%
The 12-month low-high for the stock is $11.35-$32.15. The dividend has been drastically cut mainly due to the gas price. Oil, which recently sold as high as $110 a barrel is currently around $88 a barrel and gas is about 2.85 per mcf.
Rather than pay the current price of $13.36, you can write the August 18th put at $13.00 and receive $.50. That reduces your potential cost to $12.50. The generous annual reduced dividend of $1.04 would provide you with an annual yield of 8.32%. Keep in mind that this is a reduced rate, which means that there is a chance for substantial increases in the future. If you do not get assigned (put), the annual yield of the premium is 32.5%. Keep in mind that you would be missing 2-monthly dividends. If you write the Oct. 20th put at $13, you will receive $.95 thereby reducing your potential cost to $12.05. In effect, you are receiving $.45 and would miss an additional $.174 in dividends as well as to take on additional time risk. However, it may well be worth it. If you do not get put, then your annualized return is 27.83%. If you did get put at $13, based on your true cost of $12.05 and assuming a monthly dividend of $.087, your yield would be 8.63%. You can then write a covered call at $13 or $14 and take in more premium money and receive the dividends as long as you own the stock. I would expect the dividend to rise or fall depending on the price of gas and oil. Another approach is to buy the stock now and sell a call at the same time. This would reduce your cost and improve your dividend yield. You can buy the stock at say $13.40 and sell the August $14.00 call and receive $.75. That means your true cost would be $12.65 and you may sell the stock at $14.00 by August 18th. Also, you would receive the July and August dividend, which should total $.176. Your total return would be $.926 for the two-month period on an investment of $12.65 for an annualized 43.92% rate.
It is important to understand that as a writer of options, it is best to write for short-term periods of time. The deterioration of your time obligation aids you as to liquidity and in most cases total annual return. Writing options is not a strategy that is designed to make huge gains. It is a means to get above current average gains and on a longer-term basis; you should end up being a huge winner. Never, never write a put option on a stock that you do not like. Also, you need to be realistic as to what premium you will get.
By the way, if the stock price goes down, the premium for a put option goes up so if you feel ERF will go down to say $13.00, and then you will be able to get a better premium. If you are looking to write a call option, then the higher a stock price goes, the more you will get for selling a call.
I have established positions in ERF.
Warren Kaplan has been writing options for 50 years. He has been a stockbroker, investment banker and brokerage owner. He currently owns and operates Kaplan Asset Management, a provider of financial assistance for small to middle market businesses. He has more than a half-century of experience in dealing with financial markets, giving guidance and consulting with management, and assisting in the development of business strategies and solutions. The Company has assisted and consulted many successful companies, such as Natures Bounty (NBTY) and Action Products International (APII), helping them to go public and trade on the NASDAQ stock exchange. His philosophy is to “do something with the profits.” “If you make $100 in the stock market, take 50 percent and invest it back into the market. Then, take the other 50 percent and buy yourself something.”
Reader’s comments are welcome. Please do not consider these opinions as advice and we take no responsibility for any trades made. You should review these option writing ideas with your financial advisor so that you are properly guided. Writing options is not for everyone. If you want information about a certain stock, please email firstname.lastname@example.org.