Oil Futures Keep Rising, and Shorting Chevron Covered Calls and Cash-Secured Puts Works

Oil is now at a new high of $113.24 ahead of Trump's Tuesday evening Iran deal ultimatum. Chevron Corp (CVX) stock is higher, pushing up CVX put and call option premiums. 

As a result, investors can make good money selling short out-of-the-money (OTM) CVX puts and calls over the next month. This article will show how.

CVX closed at $198.86 on Monday, off its recent peak of $211.15 near the end of March (3/27). It's essentially been tracking the price of the West Texas Intermediate May Futures contract.

The market believes oil may remain elevated due to Mideast oil supply disruption, the Strait of Hormuz passage issues, and pipeline disruptions.

As a result, call option premiums for CVX stock are elevated.

Closing Out Existing Covered Call CVX Plays

I discussed this play in my last Barchart article on Chevron stock last month (March 8, “If Oil Is at a Peak, Does Shorting Chevron Puts and Calls Make Sense?”).

For example, at the time CVX was at $189.94, and I discussed selling short covered calls expiring April 17 at the $200 and $210 strike prices. The premiums received were $4.05 and $1.96, respectively.

That means an investor would receive a 2.13% covered call yield with the $200 strike price (i.e., $4.05/$189.94), and a 1.03% yield shorting the $210 call option strike (i.e., $1.96/$189.96).

However, today, since CVX has risen close to $200, it makes sense to roll these call option plays over to the next month.

For example, the April 17 $200 call option midpoint premium is $3.93. So, buying this contract back results in a small profit (i.e., $4.05-$3.93 = $0.12.) 

However, it probably makes more sense to just let this $200 strike price CVX contract get exercised. That will result in a net positive return:

  $200-$189.94 = $10.06 capital gain/$189.94 =  5.30% capital gain over one month

 + $4.05 income (i.e., 2.13% covered call yield) = $14.11 total return/$189.94 = 7.43% total return

In addition, investors who sold short the $210 covered call for $1.96 can now buy that back for $1.09. That gives them a one-month return of $0.87 or a 0.5% one-month yield.

New Covered Call CVX Plays

Now the investor can look at shorting new covered calls with May 15 CVX expiry call option contracts, 39 days from now.

For example, the $220.00 call option strike price, over 10.6% higher than today's price, has a midpoint premium of $1.85. That provides a short-seller of this call almost a 1.0% one-month yield:

   $1.85/$198.86 = 0.00935 = 0.935% return over the next 39 days

Here is what this means. An investor buys 100 shares of CVX stock at $198.86 for a total cost of $19,886. The account will then receive $185.00 when the investor enters an order to “Sell to Open” 1 call option at $220 for May 15 expiry.  

However, there is only a 17% chance CVX will rise to $220, based on the delta ratio. So, investors willing to take on more risk could short the $210 CVX call option, just 5.60% higher.

Now the midpoint premium is $3.97, providing a short-seller a 39-day yield of 2.0%:

  $397/$19,896 cost = 0.01996 = 2.0% yield

Shorting OTM CVX Puts

Some investors would rather not have to buy CVX shares at these elevated prices to gain option income. They can do the opposite and make income by shorting CVX puts at strikes well below today's price. That only obligates them to buy shares in the future, not now. 

The brokerage firm just requires collateral equal to 100 x the put strike price shorted.

For example, an investor can enter an order to “Sell to Open” 1 put contract for May 15 expiry at the $185.00 strike price. That price is about 7% lower than today's price and would only obligate the investor to spend $18,500 to buy 100 shares if CVX fell to that price.

But an investor earns $2.90, or $290 per put contract shorted with this cash-secured short-put play. In other words, the yield is 1.57%:

  $290/$18,500 = 0.01568 = 1.57% short-put yield

Note that there is just a 23% chance of CVX dropping to $185, based on its -0.2277 delta ratio. That makes this a good potential yield income play over the next month. And even if this occurs, the investor has a lower breakeven point:

  $185.00 - $2.90 = $182.10, or -8.4% below today's price of $198.86

The bottom line is that shorting OTM calls and puts provides good income opportunities for investors who want to track CVX's moves over the next month.