Option strategies for the Sweet 16

[DSG]

First time post so 'Hello Forum':

I'm looking at buying call options for some of the Sweet 16 and maybe some of the small caps. Of course with calls it's all about timeframes - if the stock achieves its outstanding upside but does it after my options have already expired then I'm simply out 100% of the money.

After listening to the presentation and Q/A from the 4/14 Monthly Market Update, it sounds like some of the gassers have a strong potential to jump up quite a bit and quite quickly. I'm mostly interested in gambling ok-to-lose money on the strikes the general market has deemed 'highly unlikely' and are thus selling correspondingly cheap.

Wondering if Dan or anyone else here has some thoughts as to timeframes for the gassers (and I'll include ESTE here as well) to start rising solidly.


Using Antero as an example:
a) It's at $35 now and EPG has fair market value at $60 but the current market estimates it'll peak at only $45.
b) Buying calls at $55 still leaves a good chance for being comfortably in the black
c) If an NG shortage hits strong and drives prices to $7+ as discussed (or even $9+ as some people are kicking around) and Antero instead hits $70 then retirement schedules start advancing

But it all depends on when. The Sept options are 3x the cost of the July options. So how likely is it that AR exceeds $55 by mid-July - how likely is it that the price of NG jumps enough to make that happen and what's the time lag before AR's stock rises in response? A big increase in NG obviously isn't going to show up on the balance sheet the following week, and if a company has a lot of its existing NG hedged then maybe that balance sheet change takes (many?) months. Some investors won't start buying up the stock until the balance sheet changes and is released and analyzed; other investors see the writing on the wall and start driving up AR's stock prices if NG merely stays where it's at for another couple weeks.

So. Maybe the July options are cheap with unlikely but huge ROI, maybe there is no realistic possibility for AR to jump that much that fast so the Sept ones should get the entire budget. Maybe some 20:80 split is a good placing of bets.


At any rate, I'm basically wondering about 1) the earliest timeframes to hit EPG FMV estimates, 2) earliest timeframes to blow past that if NG starts heading to $7+, 3) latest timeframes if they decide to drag their feet, and 4) the primary factors driving those prices and those timeframes.

I know, welcome to the forum, eh. :)

Thanks for the long read.

Dex

[Fraser921]

Do you ever write spreads?

I don't think there is a right or wrong way to play options. I personally like taking a short term position if there is a catalyst that will move the company, like earnings.

I sometimes use option strategies.

1. Long the stock and write a call against it. ie covered calls > This is the strategy I use the most. So buy Ar and sell a May or June 37 or 38 against it. If you capture 5 % a month that's 60 % annualized. And if the stock moves lower , some downside p[rotection
2. Buy a call say June and write a May and try to pick up the premium.
3. If I'm super bullish, I'll buy a call that expires within 30 days to as little as a week.

Current short term plays

Delek DK, a refinery, they release results tomorrow, trying to catch the pop on earnings and outlook.
I tried to buy MPC but the market moved away from the bid

I don't usually buy beyond 1 or 2 months

Long term options: I dont have a problem with them but its hard to say whats going to happen next 12 month in energy sector

Dan, mentioned in his monthly video, the sometimes he will write sell a put, as a synthetic long position if a stock that he likes moves lower.

Over the weekend, I listened to Warren Buffet railed against the casino market and companies like Robinhood that enables it. If you follow him, he buys a stock and never sells it for the most part which is a different mindset

WB bought OXY and Chevron, so he isnt woke, like some dopes, and he sees value in the energy sector.

[farrell90]

Thanks for starting the options thread. It should be reasonably safe to play covered call options. The obvious disadvantage is being called out on a stock you like. In my situation I am extremely over invested in the sweet 16 and have been judiciously taking profits; covered calls should be a reasonable tactic for me. The dividend paying stocks may be less volatile and I have been considering writing covered call as a strategy to reduce my exposure in CTRA, DVN and PXD.

I am open to any suggestions or comments from the EPG members.

TIA Farrell

[dan_s]

I very seldom sell covered call, but I do think it is a way to really juice up your cash yield on the high dividend paying companies. The new "fad" is upstream companies like DVN, PXD, CTRA, FANG (to name a few) that now pay very high "fixed + variable" dividends. According to my forecast models their quarterly dividend could be quite high this year. I would sell covered calls out of the money, so you don't get called right away.

I also think the minerals companies are outstand choices for a Covered Call strategy.

Take a look at my updated forecast for VNOM.
> It is trading today for $31 and my current valuation is $41.
> Buy it for $31
> Sell Dec 22 $33 calls for $3 (reducing your risk to $28)
> If you get called at $33, you've made a profit of $5
> If VNOM stays below $33 the Calls will expire (you keep $3) and you will be paid three quarterly dividends that should total $2.

I personally have done much better selling Puts, but I only do it on stocks that I really want to buy anyway.

Regarding your question about timing. Most of the Wall Street Gang won't focus on the gassers until late Q3. At this time of year all eyes are on gasoline. As winter approaches, investors begin focusing on natural gas. I think there is a good chance (over 50%) that we see $10/MMBtu in Sept or October. If so, there is a good chance AR moves over my $60 valuation within six months.
Also, AR produces a lot of NGLs. Very few of the Wall Street Gang understand the potential of the NGLs this year.

This is good stuff. Keep the discussion going.

When Kevin and I started EPG it was an extremely active chatroom. We made some HUGE gains on micro-caps like TransGlobe Energy. Our two Canadian Juniors, InPlay Oil (IPOOF) and Hemisphere Energy (HMENF) are going to be "Ten Baggers" for us this year.

[willvanam]

A lot of the sweet sixteen have low open interest and extremely high implied vols. At this point in the bull run you're likely better off buying common in Dan's high conviction names imho. There was a time last summer where you could buy DVN Jan '23 35s around $2

[Fraser921]

> open interest and extremely high implied vols

That's why i like writing the covered calls, you get a bit more premium with the high vol's and there's a bit more risk so i want some downside protection

i don't do that on all names. I try to pick my spots, usually after a name as run hard

[DSG]

I haven't worked with spreads yet but that's largely because I'm focusing on the energy sector where things are expected to 'simply go up'. I'll buy some puts but cheaper ones, solidly OTM - essentially just as insurance against a complete market crash. I do plan to get into spreads and other forms in a bit but am wanting to get the lottery ticket stuff nailed down first before changing focus to strategies for making the incremental money on the way up.

The very near term calls for the 'super bullish' scenarios are definitely something I wish I'd have been set to jump on last week when everything fell 15+% and you knew it was going to come right back. I'm curious to go pull up the history and see what various near term calls were going for 1-2-3 days after the plummet. Likewise, per Dan's strategy, I'm curious how much the puts were going for then. Pretty sweet to be considering jumping into a $20 stock, see it drop to $16 overnight, and then use some put premiums to net into it at $15.

I also like the idea of selling covered calls on stock you're ready to rebalance out of anyway. Also Dan's covered call strategy for wringing a little extra out of the strong and stable companies. Seems a particularly good time for that with all the pandemic-period hedges rolling off and the rising cash flow going to paying off debt and improving balance sheets; that and shareholders clamoring for higher dividends after the long dry spell when the companies are still less than gung-ho about dumping all the available money into exploration/production anyway.

Re the low OI and high vol: yeah, may not be a lot of activity but nobody's giving the calls away, even at the far end - no matter how high the jump there are apparently still plenty of people saying 'I could see it'.

Seems like some serious spreadsheeting is coming up. Thanks for the info so far and, absolutely, let's keep a good option discussion going.

[willvanam]

Getting closer to common and/or right tail adds

[willvanam]

Good spot to cover premium sold and look at risk reversals

[Fraser921]

I think AR is oversold. I bought AR July 34's

If NG falls, the name will fall too