Oil prices keep rising, now over $105, pushing ConocoPhillips stock higher. One play is to collect income by selling short COP put options every month. This play works well for value investors, as I showed in a previous Barchart article. It's time to repeat this cash-secured short-put play.
COP closed at $122.41 on Friday, May 15, up almost 3% (+2.89%). It's up from a recent trough of $113.87 on May 8, but still below a recent peak price of $133.80 on March 27.
If the US-Iran war heats up again, oil could move higher, pushing COP stock up as well. The Crude Oil WTI (West Texas Intermediate) June ‘26 (CLM26) futures price is now over $105 per barrel.
That's up from a recent trough price of $82.59 on April 17. It's close to a previous peak price of $107.14 on April 29. The market thought the Iran war was over in mid-April, but quickly turned around.
This can be seen in the Barchart chart on WTI futures prices below.
This has happened again as the market reassesses the possibility of a kinetic war heating up again.
As a result, both put and option premiums are elevated, providing attractive income opportunities to options short-sellers. This article will discuss these plays.
Shorting Cash-Secured COP Puts
I discussed this play a month ago in an April 13 Barchart article, “Oil Is Off Its Peak - Time to Buy Oil Stocks Like ConocoPhillips?” The cash-secured short-put play discussed in that article has worked out well.
At the time of the article, COP stock was at $122.55, and on Friday, May 15, it closed flat at $122.41. I had discussed shorting the May 15 expiry $110.00 put option, which had a midpoint premium of $1.22 (i.e., a 1.109% yield). This strike price was over 10% below the trading price at the time.
In other words, the cash-secured short-seller made $122 over one month after securing $11,000 with their brokerage firm. This meant the investor had an obligation to buy 100 shares at $110 (i.e., $11,000) if COP stock fell to that price by May 15.
As it turned out, that put option premium fell to zero (i.e., expired worthless0 on May 15, as COP stayed over $110. So, the investor kept the $122 in income, and the brokerage firm released the $11,000 collateral. This play can now be repeated.
New Short-Put COP Play
For example, the June 18 expiry period, 32 days from now, shows that the $115.00 put option strike price, i.e., 6% below Friday's close, has a $1.92 midpoint premium.
That means that an investor who secures $11,500 with their brokerage firm can enter an order to “Sell to Open” 1 put contract. The account will then receive $192.00.
This means the investor has an obligation to buy 100 shares at $115.00 if COP falls to that price over the next month. The brokerage firm keeps the $11,500 as collateral for 100 shares.
The delta ratio shows that there is less than a 25% chance, based on historical volatility, that COP will drop to this strike price.
But even if that happens, the investor has a lower breakeven price. That is because the income already received has lowered the net buy-in cost:
$115 - $1.92 = $113.08 breakeven
That's almost $10 below Friday's close, i.e., -7.6% lower. Moreover, after including last month's short-put income, the breakeven is even lower.
Another interesting play, now that COP has moved higher, is to sell covered calls, especially for existing COP investors.
Shorting COP Covered Calls
For example, the $135.00 call option expiring June 18 has an attractive midpoint premium of $1.21. That strike price is over 10% higher, and this premium provides a covered call short-seller $121 in income.
That works out to a one-month yield of almost 1.0% (i.e., $1.21/$122.41 = 0.988%). Moreover, note that the delta ratio is less than 19%, implying a very low chance that COP will rise to $135 by June 18.
As a result, some investors, willing to take on more risk of having to sell at a lower price, can sell short the $130.00 strike price. That would provide $224 in income for every 100 shares at today's cost of $12,241, or 1.829% (i.e., $224/12,241) over 1 month.
Both of these plays show that selling short out-of-the-money (OTM) COP puts and calls is an attractive way to play ConocoPhillips stock.
On the date of publication, Mark R. Hake, CFA 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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