The strategy of selling a put to purchase calls not only provides you with the opportunity to leverage your position in Marathon Oil Corporation (NYSE:MRO), but it also provides one with the chance to get into the stock at a much lower price. Only put this strategy to use if you are bullish on the prospects of this stock as there is a chance that the shares could be put to your account. If you are not bullish on the stock, then it would be in your best interest to look for alternative plays.
Suggested Strategy for Marathon Oil Corporation
It put in a double bottom formation (June-July 2012) and broke through its downtrend line nicely in July 2012. It has also been putting in a nice series of higher lows since the 22nd of June, and this can be construed as a bullish development. Finally, it broke through 26, a zone of former resistance turned into support. A weekly close above 28.50 will be a bullish development and should result in a test of the 32-33 ranges, with the possibility of an intra day spike to 34.00.
This play has two parts to it. The first part entails selling a put and in the second part calls are purchased with the proceeds from part 1.
The Jan 2013,27.00 puts are trading in the $.194-$1.97.55 ranges. For this example, we will assume that the puts can be sold at $1.94 or better. For each contract sold $194 will be deposited into your account. The proceeds from the sales of the puts will be used to complete the second part of the trade.
The Jan 2013, 32 calls are trading in the $0.40-$0.43 ranges. For this example, we will assume that each call is purchased for $0.43. For each put sold, you will be able to purchase up to four calls. If you are looking for even more leverage, you could go after the Oct 31.00 calls which are trading in the 12-14 cent ranges.
Benefits of This Strategy
You have an opportunity to significantly leverage your position in this stock for a relatively low cost. You would only need to put up $2700 to secure the put, but you would be in a position to control 400 shares. If you had to purchase 400 shares at the current price, you would have to put up roughly $10,800.
If the stock trades below the strike price you sold the puts at, the shares could be assigned to your account (assignment usually occurs on the last trading day of the option). Depending on the number of calls you purchased your cost per share could range from $25.49 (if you purchased one call only) to $26.78 (if you purchased four calls). As long as you are bullish on the stock, the possibility of having the shares assigned to your account should not be an issue, as this strategy provides you with the chance to get into this stock at a lower price.
The only real risk is that you have a change of heart and are no longer bullish on the prospects of the stock or feel that the stock could trade well below the strike price you sold the puts at. In this case, you could roll the put, buy back the old puts and sell new out of the money puts.
Company: Marathon Oil Corp
- Operating cash flow = $3.86B
- 52 week change = 162%
- Profit Margin = 11.8%
- Operating Margin = 30.9%
- Quarterly Revenue Growth = 1.4%
- Quarterly Earnings Growth = - 60%
- Beta = 1.4
- 5 year sales growth = -22.6%
- Gross Margins = 55%
- Levered free cash flow = $1.72B
- Sales vs quarter 1 year ago = 0.2&
- Net Income ($mil) 12/2011 = 2946
- Net Income ($mil) 12/2010 = 2568
- Net Income ($mil) 12/2009 = 1463
- Net Income Reported Quarterly ($mil) = 417
- EBITDA ($mil) 12/2011 = 6800
- EBITDA ($mil) 12/2010 = 6188
- EBITDA ($mil) 12/2009 = 4819
- Cash Flow ($/share) 12/2011 = 6.48
- Cash Flow ($/share) 12/2010 = 6.56
- Cash Flow ($/share) 12/2009 = 4.37
- Sales ($mil) 12/2011 = 15282
- Sales ($mil) 12/2010 = 73621
- Sales ($mil) 12/2009 = 54139
- Annual EPS before NRI 12/2007 = 5.43
- Annual EPS before NRI 12/2008 = 6.47
- Annual EPS before NRI 12/2009 = 1.63
- Annual EPS before NRI 12/2010 = 3.65
- Annual EPS before NRI 12/2011 = 3.21
- Dividend Yield = 2.5
- Dividend Yield 5 Year Average = 3.3
- Dividend 5 year Growth = - 3.40
- Payout Ratio 03/2012 = 0.22
- Payout Ratio 5 Year Average = 0.26
- Next 3-5 Year Estimate EPS Growth rate = 2.06
- ROE 5 Year Average = 15.63
- Current Ratio = 0.70
- Current Ratio 5 Year Average = 1.19
- Quick Ratio = 0.65
- Cash Ratio = 0.21
- Interest Coverage = 30
- Retention rate = 78%
While the trend is still up the markets are in a volatile phase. Consider closing half the position out if the calls are showing gains in the 60%-100% ranges. Alternatively, you can sell half if and when the stock trades to the 32.00 ranges and sell the other half if it trades to the 34.00 ranges.
EPS, company vs industry and Price vs industry charts obtained from zacks.com. A major portion of the historical/research data used in this article was obtained from zacks.com. Options tables sourced from yahoofinance.com. Option Profit loss graph sourced from poweropt.com. Earnings vs expectations data sourced from smartmoney.com.
It is imperative that you do your due diligence and then determine if the above strategy meets with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.