Most people in the market, be they investors, traders, income investors or speculators, like cash. I find it curious so many income investors – and so many speculators – leave cash on the table. Let me take apart one set of examples built around one company, Calumet Specialty Products (NASDAQ:CLMT).
CLMT is one of my favorite plays on fracking – the cracking open of shale and tar sands to yield oil and gas – and it’s one I recommend in my service, Income Edge. CLMT owns several refineries pretty close to fracking country in the Midwest not too far from where Canadian tar sands oil and other hydrocarbon products will flow through. Its refineries – and it’s bought a couple in the past few years – are small but designed to handle the nasty, heavy oil that often comes with fracking. Calumet’s refineries also focus on specialty products, including aviation lubricants, waxes, diesel and so on and are far less exposed to the world price of oil and gasoline.
The company is an MLP and the stock, around $36, has a dividend yield of 7.24%, much lower than when I first recommended back when it was below $25. No matter – it still has a long way to run. And you should consider enjoying the run by using a combination of put positions, call positions and stock ownership to do so. But not buying puts or buying calls, rather selling them (writing them) to boost that yield.
The stock goes ex-dividend at the end of April, and here is one approach to consider:
This week monthly options expire and they become, in effect weekly options. If you sell to open (write) the CLMT February monthly put which expires Feb. 16, it will generate between $15 and $25 a contract. Split the difference, and you net $20 a contract for a few days. If the stock tumbles with a market selloff, you get it a buck cheaper than it is now.
Assuming those puts you wrote expire worthless, buy CLMT shares and sell the March calls against them (a covered call strategy). If you sell (write) the CLMT March $35 calls – yup, they are in the money – you will net around $1.70, or $170 a contract. You now have $1.90 per share in your pocket.
If the stock moves, buy back the call and sell (write) the April calls. If you do it the week before expiration – the week of March 11 – 15 – you will again net a reasonable premium, let’s say 50 cents more than the cost of buying back the March call. Now you have $2.40 in your pocket.
In April, you have a decision to make – a good one. If the stock is above $35, you can be called out. You paid $36, you have $2.40 in your pocket, and you will net $1.40 a share. In two months, or on an annualized basis, you’ll net $8.40, a return of 23.33%.
If the stock has slipped, you still have the $2.40 and at the end of April you will collect a dividend (probably) of 65 cents. That brings your cash in hand to $3.05 per share. If the stock never moves and you do this four ties a year, you net $12.20 a share or an annualized return of 33.9%.
This is not complicated – we do it all the time in Options Income Blueprint. That 33.9% return sure is better than the current yield of 7.24%, don’t you think?
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