ConocoPhillips is one of the largest Oil and Gas Exploration and Production (E&P) companies in the U.S. and its Balance Sheet is among the strongest in the Energy sector. Two fundamental metrics the Covered Calls Advisor uses when evaluating Energy companies are the trailing twelve months: (1) price to tangible book value ratio, and (2) total debt to equity ratio. These are currently at attractive levels for COP (1.68 and 47.8 respectively). In addition to its fundamentals, COP was also attractive on a technical basis. The 2-day Relative Strength Indicator [RSI(2)] had declined to oversold (readings below 30) territory -- 24.0 today when this position was established.
In addition, Energy Sector companies are currently especially speculative given the wild price swings in WTI Crude this year and the fact that its current spot price around $38 is still below the average price during any of the past 10 years (see St. Louis Fed chart below). Given this speculative environment, any Covered Calls position in the Energy sector must first provide an extraordinarily high reward (i.e. potential annualized-return-on-investment) to adequately compensate for the high risk of investing at the current time in this sector. A second good way to moderate the risk is to substantially hedge the stock purchase by establishing a moderately deep in-the-money position with substantial downside protection to the stock's breakeven price -- which for the current position is 7.3% below the $46.50 purchase price. Both of these objectives are achieved with this position.
As detailed below, a potential return-on-investment result is +2.0% absolute return in 10 days (equivalent to a +74.5% annualized return-on-investment). The specifics for this position are as follows:
ConocoPhillips (COP) -- New Covered Calls Position
06/10/2020 Bought 300 shares of ConocoPhillips stock @ $46.50 per share
06/10/2020 Sold 3 ConocoPhillips June 19th, 2020 $44.00 Call options @ $3.38 per share
Note: this was a simultaneous Buy/Write transaction. The Open Interest is 1,997 contracts in these Call options and their Implied Volatility was 55.4 when this transaction was executed.
A possible overall performance result (including commissions) would be as follows:
Covered Calls Cost Basis: $12,938.01
= ($46.50 - $3.38) * 300 shares + $2.01 commission
Net Profit Components:
(a) Options Income: +$1,014.00
= ($3.38 * 300 shares)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If COP stock is above $44.00 strike price at June 19th expiration): -$750.00
= ($44.00 -$46.50) * 300 shares
Total Net Profit: +$264.00
= (+$1,014.00 options income +$0.00 dividend income -$750.00 capital appreciation)
Absolute Return: +2.0%
= +$264.00/$12,938.01
Equivalent Annualized Return: +74.5%
= (+$264.00/$12,938.01)*(365/10 days)
