Tuesday, June 10, 2008

Using Puts to Pay at the Pump: More Oil Stocks

Yesterday we looked at a way we could use petroleum giant Exxon-Mobil to help pay for our skyrocketing fuel bill. We did this by selling puts to generate income according to two methods:
1. Writing front-month options with strikes closer to the current price.
2. Writing puts with further out strike prices, say 6 months to 2 years.

Whichever method one selects depends on the options pricing and the expertise and commitment of the investor.

Today I'd like to expand yesterday's discussion and look at other candidates from the oil sector as well as touch on other income generating methods. I looked at the charts of the top companies across all the industries in the oil sector--equipment makers, drillers, exploration companies, field services, plus several others--and selected the ones that I felt had the most compelling charts. I'm telling you this so you'll know that the stocks that I'm about to recommend are selected from all industries and don't all fall into one category. I did this for diversification purposes just in case you want to write puts on several stocks. I also tried to select companies with lower stock prices, and in the few instances where the stock is more expensive, I suggest writing a bull-put credit spread instead.

Okay, enough banter. Here's my list of stocks and how to play them (in no particular order).

Note: If there's a large difference between the bid and the ask price, my suggestion is to place a limit order someplace between the two. You'll have a better chance of getting filled if your price is biased towards the bid side.

The High-Priced Spreads
Aegean Marine Petrol (ANW): This company provides fueling services to ships in port and at sea. Its profits along with its stock chart has been steadily increasing. The company's recent purchase of four new tankers indicates that it expects its business to keep on expanding, at least for the next couple of years. The stock trades in an upward trending, narrow range, and for the past month it's been bouncing off its 30 day moving average (dma). It's currently trading right at its 30dma around $40/share, so if you like this stock, now would be a could time to sell a put position. It has major support levels at $27.50 and $35. Here are the puts I like right now:
Very Risky: Jun40: $1.45 bid x $1.60 ask, Open Interest (OI) = 555. Options expiration is only 11 days away, and since this option is at-the-money (ATM), I would suggest it only to the most hale and hearty--or those who would love to buy the stock at the strike price.
Moderately Risky: Sep35: $2.10 bid x $2.25 ask, OI = 349. Less risky is the Sep30: $0.75 bid x $0.85 ask, OI = 464. You could also take the more conservative approach and sell a bull-put credit spread with a total credit of $1.35 per contract.
Least Risky: Dec30: $1.60 bid x $1.75 ask, OI = 634. Dec 25: $0.60 bid x $0.70 ask, OI = 80. You can also combine the two into a bull-put credit spread for a price of $1.00 - $1.05.

Helmerich Payne (HP): This company engages in drilling oil and gas wells for others (it doesn't own any of its own). It also sports one of the very best charts in the sector with its price doubling in just the last seven months to around $65. It's risen so fast and furiously that I think it might be due for a much-needed breather, especially since a Goldman Sachs analyst recently upgraded it last week. (Uh, why did it take him so long?) The company is contracted to continue its drilling efforts for the next several years so it should be keeping itself quite busy. The chart shows minor support levels at $60 and $50 with major support in the $43-$46 range. The stock has a tendency to bounce off of its 30 dma and 50 dma, and I'd wait until it hits one of those before selling puts.
Moderately Risky: Sep55: $2.15 x $2.30, OI = 389. Less risky is Sep50: $1.10 x $1.25, OI = 252. Bull-put credit spread using these options for a credit of $1.05 - $1.10.
Conservative: Jan45: $1.60 x $1.70, OI = 2058.

Ultra Petroleum (UPL) & PetroHawk Energy (HK): Both companies are involved in domestic oil and gas exploration, drilling, and production. Although they sport similar charts, I prefer UPL because its rise has been steadier and less dramatic than HKs, despite Jim Cramer's fawning all over the stock (HK) yesterday. UPL is trading down from its all-time high set a few days ago, and judging from the topping tail that it put in on that day, it looks like it'll be heading south for a while. I'd wait until it bounces off of its 40dma that its been using as minor support before jumping in. It's currently trading around $95, and shows major support levels at $80, $75, $70, $63-$66, and $60. It has a very solid support level at $75, and I'd either sell puts at or below that level or else sell a 75/70 credit spread for the longer term.
Conservative (UPL): Jan75: $4.00 x $4.30, OI = 4811. Jan70: $2.95 x $3.20, OI = 5825. The credit spread using these options would be from $1.05 - $1.15.

Weatherford International (WFT): The company provides equipment and services used for drilling and production of oil and gas wells. Yes, this company is similar to HP but I like its chart and I like the drillers since they have solid contracts for the next couple of years. WFT is also cheaper than HP ($45 versus $65). WFT has minor support at $40, and major support at $35-$36 and $30. The stock put in a topping tail along with most of the other oil stocks several days ago. It's still trending down and I'd wait until the price stabilizes before I'd write any puts. Note that the options on this stock are much more liquid than the others meaning that you'll be able to get better fills.
Risky: Jul42.50: $1.55 x $1.65, OI = 2013.
Conservative: 10Jan35 (2010 Leaps): $4.20 x $4.90, OI = 496, or even more conservative is 10Jan30: $2.50 x $3.10, OI = 232. Again, the most conservative approach (if you're not interested in buying the stock) is the credit spread of the above at $1.75 - $1.95.

The El Cheapo Stocks
These are two good stocks that are cheap enough to own.

Gran Tierra Energy (GTE): I've been following this stock since it was trading around $1.50 which was just last October. Since then, it changed its stock symbol (from GTRE) and climbed up over 500% to $6.50. Did I buy any at $1.50? Um, no. But I just might sell some puts to see if I can get it at a good price. The company is engaged in oil and gas exploration and production and has properties in South America. The chart is indicating that it's taking a break, so I'd wait before I do anything and jump in if it gets back down to the $6 neighborhood. One good strategy would be to sell puts at the $5 strike in the hopes of buying the stock. If and when the stock is put to you, you can then use it to generate more income by selling covered calls. Nifty, huh?
Moderately Risky: Nov5: $0.65 x $1.05, OI = 186. This option is rather thinly traded but you'll probably get filled if you keep placing a limit order between the bid and the ask.

Harvest National Resources (HNR): This is yet another exploration company engaged in developing oil and gas properties in South America, Africa, Indonesia, and China. The climbing price of oil bodes well for all oil exploration companies, including this one. The stock suffered a serious decline losing over 30% of its value in the last two weeks in April. But since then, it's made a remarkable comeback and is trading at $11, just two bucks shy of its pre-fall level. Company insiders have been buying the stock which is something they wouldn't be doing if they didn't feel it was a good investment. The stock has fairly strong support levels at $8, $9, and $10. The stock is still rising but it needs to make it past $12 resistance. If it can't do that, then I'd wait until it pulls back, perhaps to $10.50 or even $10.
Only decent play: Dec10: $0.70 x $0.85, OI = 271.

These are my picks but if you have a particular oil company that you love to hate, then go with that. You'll get much more satisfaction at the pump. Remember, too, about royalty energy trusts which I mentioned as a way of generating income in my February 19th blog. You can apply this method of selling puts on any of the optionable trusts that you care to buy. The optionable trusts are the following: HGT, BTE, BPT, SJT, PBT, and PWE. They all sport dividend yields of 8-12%.

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