Good Times For A Change: Spot Tanker Rates

| About: Nordic American (NAT)

Recently, Nordic American Tankers (NYSE:NAT) CEO and Chairman Herbjorn Hansson wrote a Letter to Shareholders commenting on improved SUEZMAX tanker daily rates. These rates improved significantly over the past quarter and now range from $55,500 to $76,500 a day depending on route. While he is candid to point out he is not forecasting rates, the daily spot contract rate is critical to Nordic American, as all the company's fleet is leased in the daily spot market. The break-even rate has held steady at $12K a day across the fleet for some time now, so these high rates are highly beneficial for NAT investors, especially compared to the extremely low rates seen in much of 2013.

"Options" on how to take advantage of this improvement

NAT closed Friday, 1/10/14 at $9.86. This is important for two possible trades in the stock.

The first is as a straight dividend yield play. Nordic American Tanker is currently paying an annual dividend of $.64 and yielding 6.7% at the current price. The next ex-dividend date has not been announced yet-in the past two years it has been in both late January and late February. Leaving aside the arguments that NAT has paid dividends out of new capital for the past few years (it has), this dividend looks much more secure at the current daily spot rates. While it is impossible to forecast how long these rates will continue, there are some positive signs in the improving spot rates, as is the creation of Nordic American Offshore (NYSE:NAO), with NAT maintaining a large stake in this company when it begins trading publicly.

However, there is a second trade I would like to discuss, and one I have used successfully often. NAT closed .14 below the option strike price of $10 on Friday, thereby the 18 January 2014 covered calls are out of the money and bear watching over the next week. Let's forecast a scenario where they expire out of the money and an investor could then write new covered calls at the $10 strike. The February 10 calls closed at $.35 on Friday. The bid/ask prices are higher, but let's stick to the actual trade-157 contracts changed hands on 1/10. Excluding trading costs, if covered calls were sold at this price, this would generate another 3.5% return on NAT holdings in one month, plus the capital gain of $.14 if called out on or before 22 February. Without knowing the ex-dividend date is also important-if it is before February 22 this could result in getting called out on a dividend capture play, but this would result in a 4.9% return (capital gain and call premium, again, excluding transaction costs) instead of one quarter's dividend.

Risk/contrarian view

Of course, selling covered calls on NAT would leave you vulnerable to two outcomes.

First NAT could lose over $.35 in value while you had the outstanding calls and you would have to buy them back or go "naked" if you sold the stock. Of course, you would have the 35 cents per share from the contract premium when sold and the future dividend payments as downside protection.

The second risk is rapid appreciation beyond $10. While some upside is lost in any covered call strategy, in this case I personally would be content with a nearly 5% return in just over a month. Then I would look for a retracement or another opportunity elsewhere.


As noted, I am long both NAT and have outstanding January 10 covered calls, so please take my recommendations with a grain of salt and do your own research and analysis. I would recommend looking at Nordic American Tanker and similarly high yielding, moderately priced ($10-20) stocks and try to find short-term plays that increase return by both capturing solid dividend yields and covered call plays. Nordic American Tanker is setting up this trade currently and there may be other opportunities to be found.

Disclosure: I am long NAT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I have sold covered calls in NAT that are currently open contracts.