- Energy earnings have been strong so far, and we expect Devon Energy earnings to also be strong.
- With the recent run-up in the stock price, we are not going to chase Devon shares higher, and look to take advantage of options premiums.
- While we do expect Devon Energy to announce good earnings and to rise, we think that a lot of the upside is now priced in.
Our readers know that we have been trading options in Devon Energy Corporation ( DVN ) as we look to add energy exposure to certain portfolios that we manage (personal and professional). While we have purchased some exposure, our preference for utilizing cash secured puts has thus far yielded a fair bit of income yet failed to see us add any further exposure of significance.
Today we have another contract that expired worthless. We have been rolling weeklies for a while now, adjusting our price to maximize premium income while also choosing a strike that allowed for an attractive entry price with a decent probability of the option being exercised. Our goal has been to be able to purchase more shares at an attractive price, but Devon shares have held strong and even moved higher in recent weeks. So we will be able to pocket another option premium, but will have to place our next trade around the company's earnings announcement - which will occur after the closing bell on August 1, 2022.
What We Recently Owned
We recently owned the July 29, 2022 $55 Puts that just expired worthless today. We have been selling cash secured puts for the last month and each time have rolled the maturity upon maturity or rolled on expiration Friday to lock in certain pricing.
Our View On Earnings
As we have discussed in previous articles , we believe that Devon Energy is a good long-term play due to their holdings being centered around oil and NGLs (natural gas liquids) which have much better economics that natural gas. We also appreciate that the company has streamlined and focused the company's holdings into its highest margin property and has even been able to add exposure to those holdings - a major plus as we previously described.
It should not be a surprise that we believe that Devon should report solid results, nor should it be surprising that we believe that investors will be pleased with Devon's action on the dividend and share repurchases (which we suspect will be a move higher based off of higher oil prices and profits). We are bullish energy generally, and bullish Devon Energy specifically, but we still want to manage our entry point as we do believe that the economy has entered a recession (with the stock market in a bear market); so refraining from chasing the stock should pay off.
How To Trade The Stock
We believe that there is always a trade for investors no matter where they are positioned at a given time based off of their beliefs. Since we believe that Devon Energy will report solid quarterly results, and we essentially have no position in some portfolios as the latest puts we sold having expired, we once again find ourselves weighing our options.
If you are looking to gain exposure to Devon, we think there are two trades:
- Sell puts at your desired price, collect your option premium and wait for an assignment
- Buy the stock at the market, sell covered calls to de-risk some earnings volatility and lower your cost basis.
If you already own the shares we think there is possibly one trade to generate some additional income ahead of earnings:
- Sell some out-of-the-money covered calls to gather an options premium.
First things first, we will cover how we will trade Devon. We will roll the puts that just expired worthless to the August 5, 2022 contract with a $63 strike. We will look to get around $2.20/share, or roughly $220 per contract. We like this trade a little less as we are utilizing a less liquid contract as the round number strikes are always more popular than others but we are able to lower our potential cost basis into the $60.80/share level if the shares are in fact put to us.
We would point out that overall liquidity is decent since this is the weekly contract for the week of earnings. If the shares are not put to us next week, then we walk away from the trade with a 3.49% gain and we still have the ability to establish a position before the ex-dividend date which I believe will be September 9, 2022. (Note: we are looking to write these with the stock trading below the strike price, some investors do not like to write puts without a little spread in their favor, so keep this in mind. We are comfortable with it as we believe that the shares could rise from here, or stay relatively flat.)
The other option for those establishing a position would be to buy the shares and turn around sell covered calls. With the stock having closed at $62.85/share, we think that the August 5, 2022 Calls with a strike price of $65 is the appropriate trade. We doubt that Devon moves more than 5% to the upside, and this contract gives you a little bit of breathing room while also utilizing a liquid contract. The option premium would be about $1.23/share, so you will generate roughly 1.96% in option premiums while also potentially locking in a decent gain of 3.42% in capital gains if you do have your shares called away. So your total potential gain is 5.38% from current prices if called. This trade is for those who think that most of the recent gains have priced in potentially good quarterly results. Also, there is plenty of time to get back into the stock before the ex-dividend.
For those who already own shares, we think that selling some covered calls would be prudent after watching quarterly results from peers. Since shares are already owned, we think that the August 5, 2022 Calls with a strike of $67 will generate a premium of roughly $0.67/share, or $67 per contract. If the stock does rise over the next two weeks to above $67/share, which we do not think is a high probability, then this trade would generate a gain on the stock of 6.60% plus the 1.07% option premium would equal a 7.67% total return. If your shares are not called away, you get to pocket a decent 1.07% option premium and are still in position to collect a nice dividend (details of which will be announced on 8/1/22 along with quarterly results).
For further details see:
How To Trade Devon Energy Ahead Of Earnings