Occidental Petroleum: A Favorable Opportunity for Short Put Traders


Investors eyeing Occidental Petroleum (NYSE:OXY) have a lucrative opportunity on their hands, particularly in selling out-of-the-money (OTM) put options to generate additional income. This strategy is especially appealing for long-term investors who already hold OXY stock.

Continuing with Near-Term OTM Put Strategies

It now makes sense to continue employing this near-term out-of-the-money (OTM) short-put strategy. For instance, consider the $60.00 strike price for options expiring on October 27th, which trades at 57 cents. This represents almost a 1.0% yield for short-put traders, offering a 6% downside protection in less than three weeks.

This yield calculation is obtained by dividing 57 cents by the $60.00 strike price, resulting in 0.95%. If the investor can replicate this yield every three weeks for a year (17 periods), the expected return amounts to over 16% (0.0095 x 17 = 0.1615, or 16.15%).

Here’s how it works practically: If an investor secures $6,000 in cash and/or margin with their brokerage firm, they can execute an order to “Sell to Open” one put contract at $60.00 for expiration on October 27th. This action immediately credits the account with $57.00, which is a permanent addition to the account. For instance, if the investor secures $18,000, they can sell short three put contracts, resulting in an account credit of $171.00. This represents 0.95% of the $18,000 invested.

If this strategy is repeated every three weeks for a year, the expected return could reach $2,907 (i.e., $171 x 17). Consequently, considering the same $18,000 is utilized each time, the total expected annual return would be 16.15% (i.e., $2,907/$18,000).

Understanding Downside Risks

It’s important to acknowledge that not every trade in this strategy will be successful, and occasionally, investors may be required to purchase 100 shares using the secured cash. This could result in unrealized capital losses from time to time. However, the advantage is that investors will never be forced to sell any shares they already own.

This approach is suitable for investors seeking to accumulate a position in the stock over time, using a dollar-average cost basis. Long-term investors will also appreciate that they already earn a 1.09% dividend yield with OXY stock. Furthermore, if short put trades occasionally lead to additional share purchases, investors can earn more dividends. Additionally, over time, investors can also sell out-of-the-money (OTM) call options to generate additional income. This multi-faceted strategy aligns well with investors who want to maintain a long position in OXY stock.

Featured Image: Megapixl

Please See Disclaimer