The Stock Option Writer
© Warren Kaplan 2011-2016
December 6, 2015
The trade we made as writers of options of the LINE puts turned enormously profitable. In case you forgot, we sold $2.00 puts a month ago (Oct) on LINE (Linn Energy) for $20 per contract. The result was an annualized return of 60%. The closing stock price on Friday November 20th was $2.01.
The new question is How Should We address Oil stock in the future. Well, LINE is down to $1.84. So I have been selling puts at $1.50 for December 18 and 24 for $5.00 and $10.00 per contract. The stock is no longer selling on the basis of value, which is much higher than the current price, but on the basis of fear and forced selling. On a fundamental basis, the company no longer pays a distribution (it was once as high as $3.60 a year, paid monthly) and it is using all funds to reduce debt. I see no rush to buy the stock and if I got put (assigned) the shares, I would just sell covered calls, which would continue to reduce my cost. The cash flow from the selling of the calls would make up for the lack of distribution income. By the way, LINE sold for a price of $36.00 a unit 2-3 years ago. With $100 oil, the unit could see that price again if it is paying out $3.60 a year. Since I do not need all of the income to live on, I have been buying closed end muni bond funds and SDY so that future income is assured and we wait out this oil cycle.
The lower oil prices go, the less need, economically speaking, there is for solar, wind, coal and atomic energy. Companies involved in those industries will see less revenue. Of course, oil supply companies will see less income too. The lack of the Keystone pipeline means more risk of oil spills from train transports and increased USA dependence upon oil supplies from the Mid-East rather than from our own Bakken area in North Dakota and Canadian suppliers.
Another company that has just eliminated its distribution is Breitburn Energy Partners LP (BBEP). They too are concentrating on reducing debt. S&P rates the company a Strong Sell. The units have declined in price from $22.00 to the current $1.09. I am not writing any put options yet but I do own units and all of the calls I wrote have and will expire worthless thus allowing me to write new call options and take in more income abet at lower strike prices. In 2008, the company paid out $2.06 in distributions. Even in 2014, distributions were $1.76. Since the elimination of distributions was announced on December 1st, I would not write any put options until the price settles down and it could easily go lower than $1.00 a unit. The company does not have a buyback program in place at this time. The focus of the company’s cash flow is on (and I agree) debt reduction.
In the last 2 months, I have been writing a lot of put options on AT&T (T) and Verizon (VZ). The past options have expired worthless and that allowed me to write new put options and suck in more cash premiums. I am also long the stocks as both are excellent dividend payers and I keep writing far of the money call options in order to take in more premiums, which is income to me over and above the dividend income. T is an S&P Aristocrat stock in the SDY. That means the company has raised its dividend every year for at least 25 years in a row. I am expecting the company to announce a dividend increase at its December meeting around the 18th of this month. The quarterly dividend might go from the current $.47 to $.49. Below $33.00 a share, I have been a strong buyer and I have been selling put options with a strike price of $33.00 and $33.50. Note that the $33.50 options are in the money so the premiums have been extra large. Of course, neither company is involved with oil prices nor foreign currency challenges. On VZ, I have been a seller of puts with a strike price of $45.00, which has been in the money options for larger premiums to me and a seller of short-term calls at $50.00-$55.00 for tiny premiums.
In the last 30 days, I have been writing puts on Con Edison (ED). It has a 12-month range of $56.86 - $72.25. I have been working around the $62.50 strike price. I have written many puts at that price mostly in the money puts for substantial premiums. The current quarterly dividend is $.65 and since this stock is an S&P Aristocrat, I expect a raise in the quarterly dividend to be announced around January 15 to $.67. The current yield is 4.3%. I am long shares and I sell call with a strike price of $70 up to 90 days. I do not expect the stock to reach that price in 90 days and consider the premium to be additional income to me. If the stock trades in the high $60s, I may change strategies and write call options at $72.50 or even $75.00.
In general, oil stocks may continue to decline during this tax-selling season, which ends January 4th, the first day of trading in the New Year. It would not surprise me to see a lot of selling in the current high-flying stocks as hedge funds lock in profits in early 2016. Only write put options on stocks you really want to own at prices you choose.
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.”
Additional disclosure: I am not a registered investment adviser and I do not give investment advice. Nothing in this article should be construed as investment advice. Investors are encouraged to do their own research and seek the advice of an investment professional before investing. Writing options is not for everyone. This article was written for informational purposes only.