“The stock is trading below my cost basis, what call should I sell?”
This question is doubly important if you—as I do—believe the world will use more oil and gas in three years than it does now.
I’m not expert enough in the oil futures market to predict if and when oil or gas will do this or that. I do know, however, that I can sell a call against one of my fallen oil stocks below my cost basis and roll it forward if the stock turns around.
With these tactics, I can generate cash every week, stay in the shares, capture 50%-75% of the appreciation of the shares and continue to wait for a bottom in oil stocks without sitting back and watching the red on my screen get brighter and brighter.
For example, if you want to own the independent refiner (not to mention the best refiner and best-energy related stock), you need not go any further than Tesoro (NYSE:TSO).
The stock sells off when people dump energy mutual funds and ETFs, even though the company and the stock benefit from lower oil prices.
Tesoro stock is a buy, right here and now.
If you buy it and sell calls, you have several potential outcomes…
You can get called out and make a big, fat chunk of cash. Buy the shares around $105, sell the January 105 call and pick up roughly $5 in cash (yes, five U.S. dollars), giving you a five percent return in a month if you’re called out. And a cost basis of $100, a support level for the shares.
Bottom line: Don’t be afraid—go for long-term appreciation and short-term cash.
Yes, oil and gas will become radically less important in a generation, but just not now.
Cash, however, is always important right now.
Think about it.
(Michael Shulman owns Tesoro shares and sells calls.)