In its Q1 2012 earnings call held on April 26, 2012, Waste Management, Inc. (NYSE:WM) noted it expects to have higher capital expenditures this year due to investment in Compressed Natural Gas (CNG) trucks. The CNG trucks are quieter, cleaner burning, and emit less pollutants than conventional diesel trucks. And, with the historically low price for natural gas, the trucks should also operate at less cost than comparative diesel trucks.
For Q1 of 2012, Waste Management noted higher costs due to fuel and continued negative volume related to the company's commercial and residential lines of business. On a positive note, the company indicated an increased need for solid and liquid waste disposal, as a result of increased drilling for natural gas.
Waste Management's stock price has recently retreated and is trading near its 200-day moving average as shown below:
Put option volume for Waste Management's stock was detected as very high as shown below:
Options with high volume included the 2012 Aug 30, 31, 32 and 33 put options. The put option activity appears to be the opening of positions and could potentially be an investor or investors seeking to protect an investment in Waste Management, which is bearish. Potentially, one or more of Waste Management's competitors, such as Republic Services (NYSE:RSG), is taking market share from the company.
Waste Management releases its Q2 earnings results on July 26, 2012, and with the apparent bearish activity related to the company, an investor might consider entering a protected covered call for the company, as the protected covered call provides positioning for a profit, as well as protection from a large drop in price. A protected covered call may be entered by selling a call option against the company's stock and using some of the proceeds from selling the call option to purchase a protective put option. The put option operates as "stock insurance", in case the price of the stock drops significantly.
With Waste Management's nice annual dividend yield of 4.25%, an investor might consider entering a protected covered call further out in time in order to take advantage of receiving dividend payments.
A protective covered call entered by selling the 2012 Oct 33 call option at $1.25 and purchasing the 2012 Oct 30 put option at $0.55 provides a potential return of 2.6% (8.6% annualized), including the receipt of dividends, and provides a maximum potential loss of 6.7%. Even if the price of the stock drops to zero, the maximum potential loss is 6.7%. A profit/loss graph for one contract of the Waste Management protected covered call is shown below:
For a stock price below the $30 strike price of the put option, the value of the protected covered call remains unchanged, even if the stock price drops to zero. If the price of the stock increases to around $36, the position can most likely be rolled in order to realize additional potential return.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.