Option trades: Cenovus Energy, BA, GPC, EXPD & more!
This past week I initiated a new short options position by selling put options in a Canadian energy stock (see below). I also recently bought back a number of April- and May-expiration put options that I’d sold last fall whose premiums had since fallen to levels where they were worth next to nothing. It made sense to close out the positions (i.e., take profits) and free up some cash for other potential opportunities.
Generally I prefer to let the put and call options I sell expire worthless and avoid the transaction costs of buying them back early. This is especially true in my regular account (at E*Trade), where the relatively high commission costs can really take a big chunk out of returns from selling option premiums. However all of the put options I recently bought back were in my IRA (at Interactive Brokers), where commission costs are much lower.
Here are my recently closed positions:
- Boeing (BA: 63.84 +0.63%, yld: 2.65%) – I bought to close the May 35-strike put options I sold against BA on 10/26/09 for a 4-month net return of about 2.9%.*
- Chubb Corp. (CB: 56.05 -0.02%, yld: 2.57%) – I bought to close the April 40-strike put options I sold against CB on 10/23/09 for a 4-month net return of about 1.6%.*
- Expeditors International (EXPD: 43.65 +1.56%, yld: 0.91%) – I bought to close the May 22.5-strike put options I sold against EXPD on 10/30/09 for a 4-month net return of about 2.8%.*
- Genuine Parts (GPC: 42.66 +0.09%, yld: 3.82%) – I bought to close the May 30-strike put options I sold against GPC on 10/30/09 for a 4-month net return of about 3.8%.*
- Progress Energy (PGN: 43.77 -0.21%, yld: 5.65%) – I bought to close the April 30-strike put options I sold against PGN on 10/6/09 for a 4-month net return of about 1.7%.*
New positions
Cenovus Energy (CVE: 27.76 -1.10%, yld: 85.99%) – On 2/25/10 I sold some September 20-strike put options against CVE as it – and the market – opened sharply lower over various U.S. and European economic concerns:
Cenovus Energy is a recent spin-off from Canadian energy firm Encana (ECA). CVE controls the company’s northern Alberta oil sands production and refining joint venture with ConocoPhillips, leaving ECA as a natural gas exploration and production company.
Given that the share split occurred only last December, there’s very little trading history for CVE. To try to represent a reasonable approximation of price history, I’ve appended the two months or so of CVE’s actual trading activity to a split-adjusted ECA price history prior to that, resulting in the above price chart.
This shows that the intermediate-term picture is mixed at best. However, CVE appears to be trading well below its long-term linear regression uptrend line (extrapolated from ECA history) and near its lower trend channel, suggesting a possible buying opportunity at a somewhat depressed price. Potential long-term support appears to be in the $19-$22 range.
Fundamentally, the company recently reported fourth-quarter earnings in line with expectations and set a quarterly dividend of $0.20 (Canadian) a share. Valuation wise, the stock appears somewhat undervalued here given the company’s current earnings and expected earnings growth rate (over 20%) over the next five years – but of course a lot will depend on the price of oil. I’d be quite comfortable owning CVE below $20, which would be my cost basis (with a corresponding 4%+ dividend yield) if I’m ultimately put the shares.
* The return on cash-secured put sales was based on the premium received from the sale of the put options (minus commissions) against the unmargined capital set aside to pay for their possible assignment (i.e., my being put the shares of the stock).
