This morning, Chevron (CVX) reported Q4 2022 earnings. They were a mixed bag, with earnings missing analyst expectations by 20 cents, while revenues beat the consensus estimate by $2.5 billion. For 2022, the oil and gas producer generated a free cash flow of $37.6 billion.
However, Wednesday’s news has gotten Chevron options unusually active ever since. So I wouldn’t be surprised if today’s action on CVX calls and puts is just as busy as the past two days on the options front.
Based on yesterday’s options activities, if you’re high on Chevron stock, here are three call options worth considering.
Chevron Triples Its Buyback
Chevron announced on Wednesday that it would increase its quarterly dividend with the March 2023 payment by 6% to $1.51 a share. The annual $6.04 dividend yields 3.2%. Chevron’s raised its annual payout for 36 consecutive years.
As part of its capital allocation strategy, Chevron Also announced that it would increase its share repurchase program from the existing $25 billion to $75 billion, a three-fold increase. The new program takes effect on April 1. So no, it’s not an April Fools' joke.
The White House isn't too happy with Chevron’s capital allocation strategy.
“For a company that claimed not too long ago that it was ‘working hard’ to increase oil production, handing out $75 billion to executives and wealthy shareholders sure is an odd way to show it,” CNN Business reported White House spokesperson Abdullah Hasan said after Wednesday’s news.
I’ve never been a big fan of share repurchases, primarily because most companies do a terrible job buying back their stock. Buy high seems to be Management 101 when it comes to buybacks, but I digress.
Regardless of how I feel about them, it sure has lit a fire under Chevron option volumes. On Thursday, Chevron’s options volume was 121,758, nearly 4x its 30-day average. More importantly, the put/call ratio for buyers of call options was 0.57, suggesting that for every put contract bought, investors acquired 1.75 call contracts.
Investors are looking to ride Chevron’s buybacks to big gains on its stock and options.
The Longest Days to Expiration Play
As a relative newbie to options, I am more comfortable considering call options with longer DTEs (days to expiration).
In this case, there were two calls with DTEs of 84 days. The calls, which expire on April 21, have strike prices of $210 and $195, respectively. The former’s ask price on Thursday was $1.60, and the latter’s was $5.65. So, with the former call contract, you’re looking at a down payment of less than 1%. The latter’s down payment is a little less than 3%, so also pretty reasonable.
Meanwhile, in terms of unusual options activity, the $210 strike had a volume of 1,393, 4.51x open interest. The volume for the $195 strike was 786, 1.51x open interest. The implication is that investors found the $210 strike more appealing. It will be interesting to see how today’s trading plays out on these two possibilities.
The $210 strike’s delta was 0.15939. So if all goes according to plan, a buyer of this call would double in value after a $14.20 price increase. At its current share price, that’s a 7,6% increase in about three months. Easily doable.
As for the $195 strike, its delta was 0.39783. CVX stock needs to rise by 10.0% for this call to double in value. That’s just 5.3%.
So, I’d go with the $195 strike if you're really high on the stock. However, if you’re only interested in a short-term profit, I’d opt for the $210 strike because your initial investment is less than one-third of the other.
As I write this in the pre-market, it appears both ask prices will fall in Friday trading, but you never know.
A Third Cheaper Possibility
The final call to consider is the Feb. 10 $200 strike. It’s a Hail Mary with 22 days to expiration and a low ask price of $0.57.
Its delta is 0.11023. This means that for every $1 increase in Chevron’s share price, the option price is expected to rise by slightly more than 11 cents. Therefore, the premium should double if CVX rises $5.17, or 2.8%.
To get to the $200 strike price, making buying Chevron stock worthwhile, CVX has to rise 6.5% by Feb. 10. Chevron stock is up 2.5% over the past 30 days, so it’s not going to be easy. That's because, over the past six months, its shares are up 23% or an average of 3.8% per month.
So, the odds of making money on the call aren’t great, which is why I characterized this buy as a Hail Mary. But, heck, you’ll pay way more than $57 for a fine bottle of whiskey or wine.
If it were me choosing between the $210, $200, or $195 strike prices mentioned above, I’d go for the $195 and the higher ask, but that’s because I’m inclined to view options as a way to buy shares of stocks I like at a predetermined price, and not as a form of gambling.
Caveat emptor.
More Options News from Barchart
- Chevron's Huge FCF, Buybacks and Dividend Hike Power Option Income Plays
- Bear Call Spread Screener Results For January 27th
- 2 Unusually Active Tesla Call Options. Only 1 Is a Buy
- Why Analysts Are Pointing to a Big Opportunity in Silver
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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