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By Michael Salvatore, Editor, TradeSmith Daily


Last week, we wrote to you about the cash flow bonanza happening in oil & gas stocks right now.

In short: For such a crucially important market that’s paying out huge streams of cash to investors and is currently one of the top-performing sectors… oil & gas stocks don’t get much love, relatively speaking.

Because of that, we showed you how they’re the single-cheapest sector in the market on multiple metrics.

We told you then that buying oil & gas stocks was the simple play.

We shared a few ideas to get you started.

But there’s a whole wider world of cash flow generation from these companies we need to talk about.

By combining some fairly simple options techniques and TradeSmith’s elite software, you can score annualized returns of 50% or more by making low-risk moves in the oil sector.

Today, I’ll show you how. And I’ll give you three ideas for trades you can make today to potentially make annualized gains up to 72%, even 97%.

Let’s dive in…

Getting Paid to Profit in the Oil Market

Have you ever been to an auction and been amazed by the fast-talking auctioneer at the podium, shouting out offers at light speed as the crowd calls out their bids?

That could be you in the oil & gas sector.

You can get paid to offer up your shares of quality oil & gas stocks for sale at higher and higher prices… whether someone ultimately buys your shares or not.

Let me explain.

In the options market, there’s a special technique you can use to offer to sell your stocks at a price higher than where they’re currently trading.

Every time you do this, and a trader wants to claim the ability to buy your stock under certain conditions, a stack of cash hits your brokerage account.

The deal stays open for a short period of time. And if the conditions aren’t met… you keep the cash.

If they are and the trader wants to buy your stock, you sell your shares and still keep that stack of cash, increasing your returns even more.

Think again about the auctioneer. It’s like putting a painting up for auction and starting the bidding at a certain level.

But every time you make the offer, you get paid a stack. And once the offer meets a bidder, you sell the item and get the proceeds from both the sale AND the offers. No bids? No worries. You still get paid, and you keep your painting.

The technical term for this is selling covered-call options. When you do this, you sell the right for another investor to buy your stock at a price you decide and by a date you set.

To do it, you first need 100 shares of whatever stock you want to trade. This is what will get “called away” if your offer conditions match up with a bid.

Then, you pick a price that’s higher from where the stock is currently trading… and set a date for that offer to expire.

When you do this, you’ll get paid up front. Then you hurry up and wait for one of two things to happen: 

1. The stock rises to your offer price, and you’ll get “assigned” to the offer and sell your shares at the agreed-upon “strike” price…
2. Or it doesn’t, and you keep the proceeds from making the offer… then you can do it again and again.

So long as you continually offer your stock up at higher prices, you’re guaranteeing that you’ll be paid to profit.

Now, here’s where TradeSmith comes in to make this strategy vastly more powerful… with the Probability of Profit algorithm.

How PoP Makes You the World’s Best Auctioneer

Let’s return to the auctioneer metaphor.

Imagine if, as an auctioneer, you could get a real-time look at the likelihood an offer will be bid on.

It’d be a complete game-changer. You could ensure that virtually every item that goes to auction will not just meet a willing bidder… but you’ll also ensure that you can continually raise the offer from a logical starting point to maximize the profits.

That’s what the Probability of Profit indicator – part of our Options360 software – helps you do.

Options360 is the single-most robust piece of options-analysis software I’ve ever seen. With it you can not only see the likelihood of any options trade paying out… but you can screen for opportunities based on precise parameters.

Take a look at this screengrab. It’s the result of screening for the best covered call opportunities in quality oil & gas stocks using Options360.

These are all what are called “buy/write” options trades. They assume you don’t own the stock, and you will first buy the 100 shares and then sell the covered call: 

Let’s walk through two of these trades in detail.

Trade No. 1:

Buy 100 shares of XOM at $116.39 per share and sell the XOM May 10 2024 $117 call for $1.22 per contract.

With this trade, you’ll earn $122 in option premium for selling the call. (Each option contract covers 100 shares of stock.) Here’s the two ways this trade can play out. 

1. If XOM does not rise to $117 per share this week, the call option (“offer”) will expire and you’ll keep the full $122 in option premium. Assuming you did a similar trade each week and earned the same option premium, that would equal an annualized return of over 47%. However, as we can see via the POP indicator, this has just a 1% chance of happening.
2. If XOM does rise to $117 by Friday, May 10, the call buyer will have the right to exercise the call option you sold them and buy your 100 shares of XOM for $117 per share. This is what we call being “assigned.”
   
   You’ll sell the stock, booking a gain of $0.61 per share (or $61 per contract), then add that to the option premium of $122 for a total profit of $183. Assuming you did a similar trade each week and earned the same option premium, that would equal an annualized return of nearly 72%. According to the POP indicator, this has about a 99% chance of happening.

With this strategy, you realize a profit in either scenario. Either you make money on the option premium, or you make money on the option premium AND a capital gain on the stock. The only way to lose money is if the stock goes down – and if that happens, you’ll still keep the option premium and will only book a loss if you sell it lower.

Again – you’re the world’s best auctioneer, and you’re set up to win no matter what. All you need is for someone to show up to the auction. And the options market is perhaps the world’s biggest auction house.

Understand that using this strategy requires a good amount of capital to get started. You need to be able to purchase 100 shares of XOM, which after collecting option premium has a net cost of $11,517 in my scenario above.

But some stocks are more accessible for others with smaller account balances. Take that second trade idea on DVN, which takes just over $5,000 to get started. Let’s walk through that trade just as we did with XOM.

Trade No. 2:

Buy 100 shares of DVN at $50.73 and sell the DVN May 10 2024 $51 call for $0.80 per contract.

With this trade, you’ll earn $80 in option premium for selling the call (since each option contract covers 100 shares of stock). Here’s the two ways this trade can play out: 

1. If DVN does not rise to $51 per share this week, the call option (“offer”) will expire and you’ll keep the full $80 in option premium. Assuming you did a similar trade each week and earned the same option premium, that would equal an annualized return of 72%. However, as we can see via the POP indicator, this has just a 1% chance of happening.
2. If DVN does rise to $51 per share by this Friday, May 10, the call buyer will have the right to exercise the option you sold them and buy your 100 shares of DVN for $51 per share. This is what we call being “assigned.”
   
   You’ll sell the stock, booking a gain of $0.27 per share (or $27 per contract), then add that to the option premium of $80 for a total profit of $107. Assuming you did a similar trade each week and earned the same option premium, that would equal an annualized return of nearly 97%. According to the POP indicator, this has about a 99% chance of happening.

Once again, you realize a win in either scenario. You either get paid to offer your shares at a profit, or you ALSO sell your shares at a profit.

And what’s even better about this is how you can construct different kinds of trades designed to give up some of the option premium in exchange for having a higher likelihood of keeping the stock. When you do that, you can hold the stock for longer and collect the record dividend yields available in the oil & gas sector.

All this is possible through Options360, and it’s really just the tip of the iceberg.

While you can use the options screener to find opportunities just like this, you can also use it to construct speculative options trades designed to juice the return of stock moves… or use another options technique to offer to buy stocks for lower than they’re currently worth and get paid for the privilege.

However you use Options360 is up to you as an investor and your individual goals. 

To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily