Fuel Your Portfolio with These Option Strategies

As posted in my blog, historically oil and gas both peak in the summer months. As we can see from last year's chart, oil peaked in mid July.

I have put together a list of buy-write option strategies that are near the money (unless indicated in the money) on stocks in the oil and gas sector (with the exception of First Solar, it correlates well with the oil and gas sector) for the July expiration (July 18, 2009).

The list below is in alphabetical order, but if you'd like to see or print a spreadsheet of them ranked in order by % return and probability click here or visit my blog.

Below is a list of 50 securities. (All data priced as of pre-market Wednesday June 3, 2009).

The July options expiration has 45 days left. If oil and gas peak in mid July again, chances are most of these securities will expire above the indicated strike price, allowing the gain to be locked in. Depending on brokerage commissions and how bullish/bearish you are, you'll want to adjust the strike price and expiration dates.

Of these strategies I am most interested in: Hess (HES), National Oilwell (NOV), Noble Corp (NE), Suncor (SU), and the Direxion Energy Leveraged ETF (ERX). This is because their return % and probabilities of expiring above the indicated strike are both above the average for my analysis of these 50 stocks. For more information on how to trade and price options click here.

There are many more covered call option strategies to profit from as oil heats up this summer. If you're more aggressive and want to take on more risk check out the lower probability and higher return option strategies. If oil really heats up, any of these names could get 10%-20% higher which could be written out for a higher strike price. In a case when I am extremely bullish, I usually buy the stock, wait for a 7%-10% gain and then write out a covered call for a strike above the current price.

For spreadsheets of these stocks listed in order from least to greatest % returns, least to greatest % probability of expiring above indicated strike and the average for both, click here.

Disclosure: Long DIG, FRO, UCO

Comments

[Jay Mooney:]

What methodology was used to calculate the probability?

- Jay Mooney

Jun 03 07:44 AM

[Jayclutch:]

I was wondering that same exact thing..

Jun 03 10:07 AM

[berloe:]

Are dividends included in % returns?

Jun 03 10:31 AM

[castlegard05:]

I totally agree, the price of oil will continue to rise during the Summer months, raising the energy stocks. No one's gonna stop digging for more oil and natural gas.

Jun 03 10:39 AM

[RiskReturnO...:]

Thanks for including XLE.

Another good one is OIH, for those who don't want to risk picking the wrong oil service stock.

Jun 03 11:36 AM

[Marco Hickey:]

Hey thanks for the comment! Options probability is derived from the Black-Scholes option pricing model. Although a rather complicated calculation, once you get it down is simple. However most brokerages have probabilities available either with an options calculator or something called a "delta" value.


On Jun 03 07:44 AM Jay Mooney wrote:

> What methodology was used to calculate the probability?
>
> - Jay Mooney

Jun 03 11:58 AM

[Marco Hickey:]

Thanks for the comment! The dividend is not included in the return. However, sometimes the options market prices that in and may not change the premium too much. I am calculating the return as if I purchased the stock as of June 2, 2009 close, and sold the Call immediately for the Theo value.


On Jun 03 10:31 AM berloe wrote:

> Are dividends included in % returns?

Jun 03 12:00 PM

[Ellito:]

Oil/gas and drugs are the most exciting games
in town nowadays. Banks are dangerous.

Jun 04 05:10 AM

[User 305589:]

I suspect that seasonality may not be as reliable this year. A lot of money has already piled into oil and metals in anticipation of an economic recovery AND of the usual seasonal trend in oil. So, oil may still peak in July, but may have little upside left from here. And, since oil stocks usually lead the price of oil, your play could turn pretty bad with a vengeance. Oil stocks are very overbought and could easily correct by 20-30% short term. Imho, it is not worth the risk to play that kind of strategy right here right now. the lower vix (and lower call premiums) don't help, either.
There are much better ways to make 6-10% over the coming 6-7 weeks than your covered call plays. their risk-reward is simply not worth it imho.

Jun 04 11:06 AM

[Ellito:]

Get WRES & GMET.
You get more for you money.
also EP & PDS, the right combo.

Jun 10 05:18 AM