While we typically focus on shorter-term trades when selling weekly options for income, occasionally a longer-term play presents itself that allows patient traders to reap high cash rewards.
That was the case with our recent trade in ConocoPhillips (COP) in the Income Masters program.
As I’m sure you know, ConocoPhillips is an oil and gas exploration and production company. Energy stocks were hit hard in early 2023 before beginning to rebound in the summer thanks to rising oil prices.
We entered a ConocoPhillips buy-write in mid-September, as oil prices were showing strength on production cuts by OPEC+.
We bought 100 shares of COP on Sept. 14 at $124.67 and sold a COP 29 Sep 126 Call for $1.46. The income from the covered call lowered our cost basis on shares to $123.21. At the time, we noted that our goal was to ideally be called out of shares on or before the expiration date at $126, making a $2.79 per-share profit from a combination of the option premium and capital appreciation.
Having our shares called away early was made more likely by the fact that COP was set to go ex-dividend on Sept. 29 with a $0.60 per-share payout. So, it was possible that we would have our shares called by investors seeking to capture that dividend.
As it turned out, COP traded lower after we entered the position. The bright side was that we were able to collect the dividend and roll our call out and down for a solid credit.
We continued on with this strategy, rolling our calls to amass cash and securing two more quarterly dividend payouts along the way ($0.58 in November and $0.78 in February).
This strategy required us to ride out some volatility, as oil prices fell in late 2023 and the stock price went below our cost basis. But we remained calm and continued rolling our calls every few weeks or allowing them to expire worthless and selling a new one after the stock put in a few consecutive up days.
COP shares continued to struggle in early 2024 before bottoming in mid-January around the $106 level. However, following the early sell-off, energy stocks have rebounded to become the best-performing sector so far in 2024.
For its part, COP is up 25% from its January low.
Just as we continued to manage our covered call on the way down, we managed it on the way up as well. The only difference was that now, in addition to collecting income, we were also focused on rolling our call up to capture more capital appreciation, moving our strike up from 116 to 119.
But with the continued run-up in COP shares, our COP 12 Apr 119 Call was well in the money heading into Friday’s expiration. Rather than attempt to chase shares higher, which would have required giving back some of our income, we let members know it was time to book profits by allowing shares to be called away.
Over a seven-month period, we successfully reduced our cost basis on the position from $123.21 to $110.40. When our shares were called away at $116, we pocketed a profit of $860 on our 100 shares, translating to a 7.8% return on capital.
This trade exemplifies the potential rewards of a well-executed buy-write strategy, especially when combined with patience and strategic adjustments. While longer-term positions aren’t the norm in the Income Masters program, they can be valuable additions to a diversified trading strategy, offering a compelling alternative to short-term put-selling tactics.
