Covered Call Yields with ConocoPhillips Are Attractive as COP Stock Is Near a Peak

ConocoPhillips stock (COP) is just off a three-month peak. That makes selling COP covered calls with a one-month expiry attractive to shareholders. Here's an example: the $140 call expiring Sept. 25 yields 1.75%.

COP closed at $133.25 on Monday, Aug. 24, down just over 1%. It's down from a 3-month peak of $134.89 on Aug. 20. That's well over a recent trough of $115.04 on Aug. 5.

Investors seem to be betting that oil prices and the U.S.-Iran war will ease over the near term. For example, the Sept. '26 WTI Futures contract (CLU26) is at a near-term peak of $87.83 late Monday.

The last time oil prices were close to this peak, they subsequently declined as tensions eased. This is seen in the Barchart Crude Oil WTI Sept. '26 futures chart below.

The point is that investors are not concerned that military action or all-out war in the Middle East will flare up again. That is why COP stock has been rising, but it could later reverse, especially if tensions rise with further U.S. and Iranian military action.

As a result, it could make sense for existing shareholders to take advantage of this by selling out-of-the-money (OTM) covered calls.

Here is one play that is worth considering.

Shorting COP Covered Calls

For example, the Sept. 25 expiry call option chain shows that the $140.00 strike price has a midpoint premium of $2.33 per contract. That means that buying 100 shares of COP today and then immediately selling the $140 call option expiring in 32 days provides an investor a good yield:

  $2.33 / $133.25  = 0.01748 = 1.75% for one month

The point is that if an investor can repeat this every month for a year, the expected return (ER) is high: 1.75% x 12 = 21.0%.

This also allows the investor to make up to an additional 5.0% if COP rises to $140 on or before Sept. 25. 

The bottom line is that this is one way existing shareholders can earn extra income from owning COP shares.

Shorting OTM Cash-Secured COP Puts

If the investor has additional capital to invest, another attractive play is to sell out-of-the-money (OTM) cash-secured puts. I discussed this in my last Barchart article on COP on July 27.

For example, the $114.00 put option expiring Aug. 28, on July 25, had a $2.90 premium. (The strike was just over 5% below the trading price of $120.26, so it was “out-of-the-money.”) 

That meant the investor could short this premium and make an immediate yield of 2.54% (i.e., $2.90/$114.00).

Today, the premium has fallen to just 8 cents on the bid side and 4 cents at the midpoint. The point is that most of the income has been earned and the investor can roll this over.

Here is a new and similar play. The Sept. 25 expiry period shows that the $127.00 put option (i.e., 4.76% OTM) has a midpoint premium of $1.98. That means a short-seller can earn:

  $1.98 / $127.00 = 1.559% 1-month yield

Moreover, the delta ratio for shorting this put option is very low, so the chance that the investor's account would be assigned to buy 100 shares at $127 is low.

Combined Income Expected Returns

In addition, this short-put play can add to the investor's covered call premium income. It also helps mitigate against any upside over $140 that would be forfeited if COP rises over that price.

For example, the combined income from shorting calls and puts on Sept. 25 would be $233 +$198, or $431, for capital costs of $13,325 + $12,700, or $26,025 over 1 month. 

That is 1.656% on average for the month, or an annualized ER of almost 20% (i.e., 1.656% x 12 = 19.87%).

This is much better than analysts expect from just owning COP stock. For example, Yahoo! Finance says the price target from analysts is $145.33. That's just 9.0% higher, much lower than what an investor could make shorting puts and calls every month for the next year.

The bottom line is that shorting out-of-the-money (OTM) covered calls and OTM puts in COP stock could provide good income and high expected returns.