Gas-Pump-300x199Gasoline prices are touching four bucks a gallon in many parts of the country due to a growing tightness in the world oil market and refinery issues in the U.S. — including increasing exports of refined petroleum products.

What can investors do?

Make some money on the refiners. Not the traditional ones, the specialty ones.

The name I like right now is Calumet Specialty Products (CLMT). The best strategy with CLMT is to own it for the long term, collect a fat dividend and sell calls or simply sell puts every month.

Why Calumet?

I have followed CLMT closely for the last year and the reason is simple: In the oil exploration space, it enjoys great locations and unique product mix combined with a 7.5% yield

Calumet owns several smaller refineries in the Midwest that are benefitting from the availability of oil from fracking shale formations. These refineries — Calumet has bought several in the past few years — are equipped to handle oil from shale and when it starts to come down from Canada, oil from tar sands (that is my belief). These refineries also produce specialty products such as aviation lubricants and a much higher percentage of diesel fuel than most other refineries, insulating the company from many of the mood swings in the gasoline market.

The stock has been on a tear and will struggle short term to slice through $40. So consider buying the shares and selling a near-term call option, preferably April $40 call.

If you sell the $40 calls for April and they expire worthless and you do this every month, you more than double that dividend. If you want a slug of cash right now, the April $40 calls will generate more than 2.5% return in six weeks or so.

If you opt to sell puts, you need to look at April $35 put options that will generate a rerun of 1.4%, roughly 11% on an annualized basis.

A bit low for my taste but this position provides a bit more flexibility in your portfolio.

 

 

 

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