• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Energy

Why You Should Sell Put Options in Energy Stocks

Put long-term capital to work with Chesapeake Energy and Murphy Oil.
By SHAM GAD Jul 07, 2015 | 03:00 PM EDT
Stocks quotes in this article: CHK, MUR, CNX, BP

Most investors are familiar with the basic parameters of stock options. A call option gives the buyer the right to buy a specific stock at a predetermined price within a certain timeframe. A put option gives the buyer the right to sell a specific stock at a set price within a certain timeframe.

When you sell options, however, the responsibility shifts from a right to buy or sell to an obligation to buy or deliver the underlying stock. With equity values of energy companies collapsing over the past several weeks, long-term investors may wish to consider selling puts on them. 

When you sell a put option, you are obligating yourself to buy the underlying stock (in option parlance, this is known as having the stock "put" on you) at a certain price inside a certain timeframe. For this obligation you are paid an option premium.

With shares close to $10, Chesapeake Energy (CHK) may be one of the most compelling energy bets today. The company is refreshed with a fantastic CEO in Doug Lawler who is monetizing assets very attractively. Chesapeake's book value today stands at $15 and what is intriguing is that this value reflects an asset write-down to reflect today's lower energy prices.

Because of this and many other facts that I've written about over the past months, I recently sold a boatload of the January 2016 $10 put contracts for around $1.25 or $125 per contract. If Chesapeake shares fall to $10 any time between now and the third week of January, I will be required to buy the equivalent amount of shares based on the contracts I've sold. But I keep the premium, essentially paying $8.75 per share of CHK stock -- a price I'm willing to load up on. If, on the other hand, shares don't touch $10, I keep the option premiums. 

The caveat to selling puts, in my view, is to be willing and able to own the stock. If you sold 100 contracts of CHK based on the above and had to take delivery of the shares you will have to be able to buy 10,000 for $10, or $100,000 less the premium you are paid. Selling put options creates a lot of leverage that you have to be able to assume. 

But if you believe that energy stocks are in a cyclical downturn and that the cycle will reverse itself over the next several years, now may be a good time to put long-term capital to work. In addition to Chesapeake, Murphy Oil (MUR), Consol Energy (CNX) and BP (BP) are attractive names to consider. These are all names that can withstand the low price environment and do well if oil stabilizes near today's prices. 

The bottom for oil may not have been reached yet, and prices that look low could get lower. Before selling any puts, the idea of owning the stock has to be attractive to you.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Gad was short January 2016 $10 CHK puts, although positions may change at any time.

TAGS: Investing | U.S. Equity | Energy

More from Energy

The Pendulum Swings Back, but Don't Look for Things to Stabilize

Peter Tchir
Aug 15, 2022 11:00 AM EDT

It could swing past the point where things look normal or OK to a point where things look bad again.

Where Are Crude Prices Heading, and Could They Clog Up a Recovery?

Bruce Kamich
Aug 12, 2022 11:00 AM EDT

Let's check the charts to see where we can expect oil prices to flow.

PPI Cools, Home Prices Don't, Fed in the Dark, Technical Battle Lines, Chevron

Stephen Guilfoyle
Aug 12, 2022 7:29 AM EDT

Just when is the Federal Reserve going to reduce the cash slosh, anyway?

This New Energy Fund Sounds Dirty, But Could Help Investors Clean Up

Mark Abssy
Aug 11, 2022 1:33 PM EDT

The Strive U.S. Energy exchange-traded fund is billed as an anti-ESG ETF. Let's see how it stacks up against the similar Energy Select SPDR Fund.

CorEnergy Is a Pipeline to High Yield

Jim Collins
Aug 11, 2022 1:15 PM EDT

It's the best of both worlds, a hydrocarbon company that also has a green component.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 10:24 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    To Improve Your Trading and Investing, Spend More ...
  • 08:44 AM EDT PETER TCHIR

    CPI Beats Expectations, But Maybe Not the 'Whisper'?

    Slightly better-than-expected inflation across the...
  • 01:44 PM EDT STEPHEN GUILFOYLE

    This Holding Lights Up With Strong Earnings

    Check out the latest from TheStreet's Stocks Under...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login