Stock Options To The Rescue! Marathon Oil (MRO)
Today we’re looking at an options trade on Marathon Oil to reduce your cost basis and profit from the recent decline in the stock.
Here’s what happened…
Marathon Oil (MRO) shares are down 10% from $30 to $27 after its earnings missed Wall Street expectations.
Here’s the deal…
The oil and natural gas producer reported ugly first quarter earnings. Profits fell from 88 cents per share a year ago to just 67 cents. And they came up well short of the 88 cents Wall Street analysts were expecting.
However, revenue grew 6.1% to $4.04 billion. This was much better than the $3.37 billion analysts were expecting.
Management said production available for sale declined 4.3% to 383 million barrels of oil equivalent per day.
Here’s the kicker…
MRO sold oil for an average of $106.06 per barrel last quarter. That’s an increase of 10.7% from the same period last year.
However, low natural gas prices hamstrung MRO last quarter. They sold natural gas for an average of $2.96 per 1,000 cubic feet… a decrease of 11.4% from last year.
MRO obviously took a big hit from lower than expected natural gas prices. But that’s no reason to sell a great stock like MRO. Instead, rescue your trade with the help of options.
Here’s what to do now…
Let’s assume you invested $3,000 to buy 100 shares of MRO at $30.00 before earnings. So you’re down about $300 on the trade. But you don’t want to sell the stock because it has a hefty 2.5% dividend yield.
Selling the MRO January 2013 $29 covered call can rescue this trade.
Right now, you can sell the January 2013 $29 call for $1.90. You collect $190 in option premium as the seller and you still own 100 shares of the stock. So you’ll collect $51 in dividend payments over the rest of the year.
Dividend payments and option premium will reduce your cost basis $241 to $2,759. So you’ll own 100 shares of MRO at an average cost of $27.59.
There are two possible outcomes for this trade…
First, if MRO is above the $29 strike price, the option holder will exercise their right to buy your stock at $29 per share. So your 100 shares will be called away or sold for $2,900.
But that’s just fine by us… Remember, we reduced our cost basis to $2,759. So we’re out of the trade with a 5.1% profit of $141.
However, a more likely scenario in my opinion is MRO never reaches $29.
Remember, weak natural gas prices weighed down MRO’s earnings in the first quarter and prices are even lower this quarter. And now oil prices are declining as well.
Simply put, falling oil and low natural gas prices will likely weigh on the company’s profits all year. And that’s likely to keep the stock depressed the rest of the year.
If MRO stays below $29 until January, the option will expire worthless. You’ll get to keep the $190 in option premium, the $51 in dividend payments, and you’ll still own the stock at an average price of $27.59 per share. And at a current price of $27, you’re already making money.
In my opinion, selling a covered call against your MRO stock holding is much better than selling or doing nothing. This strategy reduces your costs basis and puts you on the fast track to turning this losing trade into a winner.
Good Investing,
Corey Williams
Category: Stock Options To The Rescue!
