Investing

BofA Securities Strategist Has Savvy December Options Overwriting Trade Ideas

Devon Energy

This stock was hit as oil prices tumbled, but it has rallied smartly recently. Devon Energy Corp. (NYSE: DVN) is an independent energy company that primarily engages in the exploration, development and production of oil, natural gas and NGLs in the United States and Canada. It operates approximately 19,000 wells.

The company also offers midstream energy services, including gathering, transmission, processing, fractionation and marketing to producers of natural gas, NGLs, crude oil and condensate through its natural gas pipelines, plants and treatment facilities.

Production is weighted toward crude oil while growth opportunities are liquids focused, anchored by the Delaware Basin, SCOOP/STACK, Eagle Ford Shale, Canadian Oil Sands, and the Barnett. Devon also owns equity in the publicly traded midstream master limited partnership EnLink.

The trade would involve buying Devon shares and selling the $15.50 strike December options, which closed Friday’s bid at $0.47, or $47 dollars per contract. The Friday close of $14.78 plus the option premium would produce a solid 8.05% gain if the shares were called away.

The $18 BofA Securities price target accompanies a Buy rating and compares to the $16.70 consensus target.

Occidental Petroleum

This energy company made huge news with a Warren Buffett backed purchase of Anadarko Petroleum. Occidental Petroleum Corp. (NYSE: OXY) is an oil-levered multinational organization with principal business segments in oil and gas and in chemicals.

The oil and gas segment explores for, develops, produces and markets crude oil and natural gas, primarily in the U.S. Permian Basin, Colombia, Bolivia, Libya, Oman, Qatar and Yemen. Meanwhile, the chemicals segment manufactures and markets basic chemicals, vinyls and performance chemicals.

The shares have underperformed since the Anadarko acquisition was announced and after the company essentially eliminated the dividend. However, the stock remains a solid idea for investors looking to add energy to portfolios.

This overwriting trade would involve buying Occidental shares and selling the $17 strike December options, which closed Friday’s bid at $0.92, or $92 dollars per contract. The Friday close of $16.56 plus the option premium would produce a solid 8.21% gain if the shares were called away.

The shares are rated Buy at BofA Securities, with a $29 price objective, and the consensus figure is $12.73.


It is important to remember that selling covered calls is not considered a risky options-related trade. However, selling option strikes so close to the current stock prices does increase the possibility of having the shares called away. With that in mind, many investors can buy the shares with no commissions and very low options commissions, which makes an 8% to 10% total return for three weeks a very solid gain.

In addition, the quoted bid prices for the options are very wide from the offer prices in some cases. It always makes sense to put a limit order to sell options higher than the bid if the spread is wide.