by Michael Shulman | October 9, 2013 10:29 am
Congress is sapping the energy out of the market — but not the energy market itself. U.S. oil and gas production is booming, refined petroleum product exports exploded to 3.6 million barrels a day and energy is the place to hide in the current crisis. I mean, if the threat is a default on Treasuries, as they say in Brooklyn, where you gonna hide, Treasuries?
Inside the energy complex, think fracking — the cracking open of shale formations to yield oil and gas in ever increasing amounts. Sounds complicated — it is not.
First, avoid the funky MLPs being issued every hour based on promises of this and that. Think revenue, not promised revenue.
Second, find operations with growth quarter over quarter due to fracking. And third, don’t buy the shares. In today’s market pick a price where you would absolutely love to own the shares, then sell the puts. If you are a long term investor or swing trader, this lowers the cost basis of the stock. If you are an income investor, this generates cash — often a lot of cash.
Take a look at Gulfport Energy (GPOR). This is a traditional oil and gas outfit with operations near the Gulf of Mexico — figured that out already, didn’t you? — and now has large operations producing revenues and profits in fracking country: North Dakota and eastern Ohio. The stock has been on a tear. GPOR has not really sold off due to the lemmings preparing to go over the cliff on Capitol Hill and premiums on puts are very rich given the low level of market volatility.
The stock is at $65; the GPOR October $62.50 puts that expire in eight trading days yield about 80 cents, or $80 a contract. If they expire worthless the return is 1.2% or 30% on an annualized basis. Not bad — and if the stock falls and you do not roll the put and accept the shares, your cost basis will be $61.70, in my opinion a very fair price for GPOR.
This all assumes the people on Capitol Hill who work just a few miles from where I am typing this — excuse me, pretend to work — do not push the U.S. into default. If you think something will be decided to push back or completely avoid default, this is a very good trade. If you believe the Boehner boys will renege on the national debt, well, no trade is a good trade.
That is not a political statement — the only person, right or wrong, fair or unfair, who can end the impasse is John Boehner. It ain’t Harry Reid and it ain’t Barack Obama — they see blood in the water and I believe they will move just a bit to avoid a default that, if it happens, they see as a path to re-taking the House of Representatives in 2014. Which, if the U.S. defaults, the Democrats will do. People may blame the Dems but the first time they get to punish politicians will be in the mid-term elections next year.
Where was I? See how distracting all this D.C. nonsense has become? This is a very rich trade for those looking for a great entry price for GPOR or income or both. I own the shares at a lower price and generate income selling shares. If you are put the shares, you should do the same.
As of this writing, Michael Shulman was long GPOR and had sold GPOR calls.
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