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For my financial risk takers out there: The Oil/Nat Gas patch is going up in smoke (time to buy)

Discussion in 'Mayberry Lounge' started by Brampton_Boy, Feb 10, 2020.

  1. Brampton_Boy Douchey Mc Douche

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    While I know Mayberry isn't necessarily the most appropriate forum for a stock discussion (although @MASShole has had some great threads in past years), I just thought I would throw out some ideas to those of you who do invest, particularly for those who are interested in options trading.

    In the past 6 weeks, the Corona Virus has resulted in the price of oil dropping 20+%. Natural gas is also approaching all time lows (although that is from oversupply), and as a result, the sector is getting HAMMERED. There are some stocks that are literally down 60+% in under a month. Given that I have a high appetite for risk and some discretionary income, here are some suggestions:

    For dividend lovers:

    I have a shitload of Vermillion Energy (VET) - they pay a 15% dividend after getting smashed over the past year, but senior management has committed to maintaining the payout, even if oil dips to $40 for a prolonged period. Unlike most other Canadian producers, they are heavily diversified across the world, and do not rely on oil sands/fracking, which tend to have much higher operational costs.

    If you prefer a larger name, Exon Mobile, Chevron, Royal Dutch Shell are all paying 5+% dividends. These are the oil giants, and will be able to weather a prolonged slump in oil prices

    For the options trader:
    I normally write covered calls against my positions to generate free cash flow from my core holdings. However, given that some oil stocks have been decimated, the premium being paid on future options contracts are juicy. As an example, Chesapeake Energy's (CHK) 2022 $0.50 call contract is paying $0.32 cents.

    Just for holding the stock, that is a greater than 60% rate of return. There are two downsides: 1) the stock falls below $0.20 cents, in which case you will be losing money, or 2) the stock rockets, and you have agreed to sell it at $0.50 cents in two years time.

    I personally don't think they are going bankrupt, and I don't mind getting 60% of my money up front (even if it does run). I bought $10K worth of shares, and immediately wrote a covered call and got back $6100 (in addition to holding the $10K worth of stock).

    Whiting Energy (WLL), SouthWestern (SWN), Range Resources (RRC) and Denbury (DNR) are all paying really high premiums on their future dated call contracts. If you don't mind locking your money in for a year or two, you have the potential to get a pretty sweet return. Please note that there are also weekly and monthly calls, so you don't necessarily have to tie up your funds (the call premium is just lower the closer you are to the strike date).

    For outright risk takers who just want to hold the stock:
    Gulfport Energy, Antero Resources and Whiting Petroleum have all gotten SMASHED lately. The falling price in natural gas has called into question whether they can service their long term debt. While this is normally a red flag, all three companies generate free cash flow and are well hedged into the future.

    If you think that oil and nat gas are here to stay, there is genuinely an opportunity to triple your position. I owned Gulfport (and sold it) at $3.30 in late December. It is now $1.12 less than 8 weeks later. Beyond the fall in oil from the Corona fears, fundamentals remain largely intact.

    With highly leveraged companies, there is always the risk of bankruptcy, so play within your limits and never buy on margin (unless you have funds to cover a margin call).

    I would be happy to answer any questions - while I am far from a skilled trader, I do generate several thousand dollars every month in passive income from dividends and covered calls. That money has also come in handy to offset losses during a market downturn. As an example, I am down $27K on Vermillion relative to my initial position, but have collected over $40K in dividend income and covered calls.

    Call writing can be an excellent strategy to hedge your bets.
     
  2. weed ベルセルク

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    ʞɹo⅄ ʍǝN
    low risk with high yield
    I traverse the battlefield
    confidence, my shield

    [​IMG]
     
  3. wlu.29 Red Belt

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    I tried to play one energy stock painted pony, and and it has lost like 70% of its value

    Luckily it was only like 3k, but im staying away from energy
     
  4. GSP_37 Titanium Belt

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    When corrupt leaders are replaced, no one will protect the few who are rich from oil and more will move to clean solar and wind energy.
     
  5. Kanuck99 Green Belt

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    That's an optimistic view. I won't hold my breath.
     
  6. TheOneAboveAll3 Banned Banned

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    I am in NG/ Natural Gas and have 2 long contracts from 1.859. I think in 2-3 weeks this will be above 2.00. If NG drops 100 or 200 more points I will look to adding another long. Playing it safe and looking to make anywhere from 1-4k soon.
     
  7. kahiljabroni Yellow Card Yellow Card

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    I havnt fked with options yet though i have thought about it. How do you write your own covered calls? Website? Process?
     
  8. Brampton_Boy Douchey Mc Douche

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    I have only ever used TD Web Broker - Discount brokerages like Robin Hood don't normally allow for options trading.

    You will have to apply for a margin account (even if you don't need to borrow any money). Once your application has been approved, buying and selling options contracts is principally similar to buying and selling stocks. While every platform is different, I know that TD has a tutorial walking investors over how to make a trade, defining terms (strike price, option premium etc.).

    For covered calls, the steps are:

    1) Buy a stock, at least 100 shares (each options contract is 100 shares, i.e. 5000 shares allows you to write 50 contracts).
    2) Look at the options spread over time - the longer the option is into the future, the higher the premium (although you are also tying your money down, unless you want to buy back your contract)
    3) Once you have selected the options expiry date and the strike price, you "Sell to Open Covered" and list the # of contracts and your price
    4) The money you receive is the number of shares you own, multiplied by the premium being paid on the option.

    As an example, I own 17,000 shares of Vermillion (VET) at an average purchase price of $20.50CAD. I agree to to sell my shares in January of 2021 at a price of $22, for a premium of $1.10. I wil collect $18700 from writing my covered call on 170 contracts (you get this money upfront), minus the transaction fee.

    If Vermillion goes to any price about $22 by January 2021, my shares will be sold (I collect both the proceeds of the sale, as well as the option premium paid to me when I wrote the covered call). If VET doesn't go to $22, I keep my shares, as well as the option premium (and I am free to write another covered call).

    If the stock runs to $40 during this time and I want to buy it back, you end up with the reverse transaction. I have to buy your own covered call back at a premium in order to sell the shares. Sometimes this isn't worth it, and I just forfeit the upside.

    It is a bit complicated to explain via text, but there are many tutorials available online.
     
  9. chill doggie Brown Belt

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    I have no idea what you’re talking about, what books do I need to read?
     
  10. kahiljabroni Yellow Card Yellow Card

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    Thanks for the info....i went and checked robinhood. I knew that you could buy options but upon further review it looks like you can sell them also. I only looked quickly but it seems like they list many different premiums and strikes and you select the one you want. Is that how you do it or do you get to write the specifics of deal?
     
  11. EndlessCritic Steel Belt

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    Well this hasn't aged too well...
     
  12. JAEGERX Gold Belt

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    yeah we'll see about that Soviet scum
     
  13. EndlessCritic Steel Belt

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    Bump... VET getting crushed hard lol.
     
  14. dissectingaorticaneurysm Red Belt

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    Hardly unique to VET, the entire energy sector is getting pummeled. If anything, it's a great time to buy right now.
     
  15. PaleMoonlight Purple Belt

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    All the sectors are getting crushed - not just energy.
     
  16. EndlessCritic Steel Belt

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    So do I buy VET now that it's fallen to $10 a share? Sorry Brampton Boy, but this one was an epic fail.
     
  17. TheOneAboveAll3 Banned Banned

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    If anyone listened to this dude they would have lost about half on what he said to buy. I am still holding long NG contracts but at least I'm only down about 15% of my account and not 50% of my account.
     

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