Bottom Fishing in Energy

09/20/2016 9:00 am EST

Focus: STOCKS

Marvin Appel

President, Signalert Asset Management LLC

Marvin Appel is president of Signalert Asset Management, LLC. Here, he suggests bottom fishing in the energy patch and featured three covered call positions for experienced investors familiar with this type of options-based income strategy.

Some oil stocks are now at potential support levels and appear attractive as bottom fishing candidates.

Below I recommend three covered call positions in large oil companies with potential total returns of approximately 1% per month over the next seven-nine months.

Chevron (CVX)

The support level is $99. The yield is 4.3%. With the stock now at $99.90, if you write covered $100 calls expiring on 6/16/2017, you collect $6.30 in option premium.

You will also get three dividend payments of $1.07 if the stock isn't called away. This is a potential return of 9.5% in nine and a half months.

Downside risk in a bad case scenario is to retest lows in the area of $75. I do not view such a retest as likely. However, MACD does suggest the more modest risk of a several percent retracement.

MACD is slightly negative and falling, likely to make a new low. CVX reached a high of $107 in July, 8% above the support level of $99. That implies a downside objective of $91 if CVX breaks down.

The option premium and dividends are sufficient to cover this amount of downside risk.

More cautious investors could wait and see if a breakdown does occur, opening the position at $95 (and, of course, taking the risk that the stock never gets that low).

Recommendation: Buy CVX below $100 and write covered calls expiring on June 16, 2017 at the strike price with the most time value.

Royal Dutch Shell A (RDS-A)

The support level is $48.50 (near where the stock is trading as of this writing). Covered $47.50 calls expiring on April 21, 2017 are $3.30 bid, which provides $2.20 in time value at the current share price of $48.60.

In addition, you would get two dividend payments of $0.94 if the shares are not called, giving a maximum gain of 8.4% over the next seven and a half months.

RDS-A hit a peak of $55.71 in July, implying a potential downside risk to $41.29 if the stock breaks down. As with CVX, the MACD suggests a period of potential weakness, although a decline to $41 seems unlikely.

Recommendation: Buy RDS-A below $49 and write covered calls expiring on April 21, 2017 at the strike price with the most time value.

ExxonMobil (XOM)

The support level is $85. With XOM at $86.25, $85 calls expiring on 4/21/2016 are $5.25 ($4 in time value).

In addition, you will receive two quarterly dividends of $0.75 if the shares are not called, providing a potential total return of 6.4% over the next seven and a half months.

MACD, which is strongly positive, shows that XOM has been stronger than the other two recommended oil stocks. MACD is on an unconfirmed sell signal, suggesting limited upside in XOM.

However, the bearish implications of this MACD formation should be modest. In a bad case scenario, the next lower support level for XOM should be around $72, which would be a retest of the September 2015 and January lows.

Recommendation: Buy XOM below $86 and write covered calls expiring on April 21, 2017 at the strike price with the most time value.

By Marvin Appel, president of Signalert Asset Management, LLC.

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