Showing posts with label MPC. Show all posts
Showing posts with label MPC. Show all posts

Monday, November 4, 2019

Maximize yield with capital gain potential MPC CVX or XOM

The goal of every income investor is income followed closely by capital preservation.  Next on our list of goals is to maximize income and retain the opportunity for capital gains.

  • The goal of the trades discussed in this post are to achieve 8% annualized cash flow from a combination of dividends and covered call premiums and to keep an opportunity for capital gains.
  • My analysis illustrates how to determine how much premium from a covered call you need to meet your goal.
  • In this article I present three stocks to consider with only one of these stocks that meets my 8% hurdle. 
In reality this is just a math exercise.  You start with either your basis on a stock or the target price at which you want to buy a stock.  For me I want 8% annual income yield on these stocks.  I will discuss why I set 8% for these stocks later in the post.   Once you have that number in hand, subtract the annual dividend.   After subtracting the dividend from the desired total income, you can determine how much you want in call premiums.

Since you want to capture the dividend with each call expiration date, you can expect to sell no more than 3 calls per year.    Assuming you actually can sell three calls per year, you simply divide the total income you want from the call premiums by three and that determines the premium you need per call to meet your goal.  Let's look at an example then we can apply this theory to real trades.


For XYZ stock we need $2.50 of additional income from premiums on covered calls.  If we get lucky you might get the whole $2.50 on the first call.  However, it is more highly likely that you will end up selling, also known as writing, calls three times during a year at an average of $.83 per contract.  One contract is 100 shares.


In this situation, once I target a stock, I start by looking for premiums rather than strike price.  In most of my covered call trades, I look for a strike price no less than 8% above my basis and usually, I like 10% or more.  I want a strike price high enough that it is not likely to be called away.

On a potful of stocks, however, I will start by looking for a premium and then determine which expiration date is after the next ex-dividend date.  In other words you do not want to sell a call with an expiration date before an upcoming ex-dividend date.  The last value I look at is strike price.

These are good stocks and I know I risk losing my shares if the strike price is too low.  If the best premium comes from an expiration date in fewer than 30 days, I am more willing to risk losing the shares to the call buyer but never, ever at below my basis.   I always want a capital gain if the shares are assigned to the call buyer.

How much capital gain I want is different with each and every stock.  Stocks like Broadcom, symbol AVGO, are very volatile.  Tweet, tariff and headline news can hammer these stocks providing an entry point and these same factors can send it soaring which makes the calls create more income for us.  Picking a high strike price is appropriate.  If you get hit, you'll likely have another chance to get in.

Other stocks are not so volatile and you are at less risk of losing your shares even when you pick a strike price only 5% or so above your basis. Let's get to specifics.

CVX (Chevron), MPC (Marathon Petroleum) and XOM (Exxon Mobil)

Below are tables of the calls available when I did my search today. November 4, 2019.

Remember, I want to add one or more of these stocks and am looking for an annual combined (dividend plus call premium) yield of 8%.

The eight percent comes from the idea that this group of stocks needs to create enough income to fund a specific project.  For me it is an annual charitable contribution but you might think of the idea when you are trying to create the income you need for your required minimal distribution from an IRA.    You don't have to use 8%.  If your hurdle is 5% simply change the parameters in the calculation.

Chevron CVX

All three stocks have good balance sheets.  Chevron carries a D/E (debt to equity ratio of only .20.)    They all have good dividend yields, Chevron's is over 4%.  And they all have revenue growth.  They earn more than they pay out in dividends as measured by EPS and free cash flow.

You can see from the table above, the concept that I can get 8% annual return on this stock by using dividends and calls is not encouraging.  I will pass on the single call available with the premium I

Marathon Petroleum MPC

MPC has the highest D/E ratio at .91 and that it is still acceptable.  It has the lowest dividend yield of 3.19% but that too is acceptable because MPC has the most robust revenue growth.  Revenue growth stimulates the juices of the call buyers.  Moreover, there has been speculation that MPC may split up to provide more shareholder value.

You can see from the table above, we have more than one option to consider.  Note the first call after the ex dividend date is November 22, 2019.    You cannot go out too long on the expiration date or you will not be able to sell three calls in a year.   Within 90 days, MPC provides two calls worth consideration.

December 20, 2019 $72.50 call for a premium of $1.18 and the January 17, 2020 calls for a premium of $1.32.

Exxon Mobil XOM

XOM pays the best dividend of the group with a yield of 5%.  XOM also has a good balance sheet with a D/E ratio of .24.  Revenue growth is the slowest of the group.  XOM calls are interesting.

Notice the only call for me that has interest is the January 17, 2020.  You could sell this call and receive two of the three call premiums you need to receive an 8% combined income yield.  However, the capital gain opportunity is weak at only 1.16%.    You could very easily lose your shares to the call buyer.


Today I added MPC and sold two calls.  I sold the December 20, 2019 $72.50 call and the January 17, 2020 $75.00 call.

We will just have to see what happens.  This is an exercise in working calls in a market with an upside bias.  It is a conservative approach because in the end if the market tanks 'ala 2009, we will still have a stock with steady income and a solid balance sheet.

Good income investing.

M* MoneyMadam
Disclosure:  Long CVX, MPC, XOM with calls on MPC

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Tuesday, March 5, 2013

PSX and MPC for covered call income + QCOM

Phillips 66 PSX
May $70
Strike Price
Cost Basis
Call Premium

Gain in $ if assigned
Call Yield
Gain Yield

This is a good time to review how to use covered calls to boost income.  I look for covered call income all the time and today I found a couple that I want to share.

You need to be knowledgeable about covered calls because they include risk.  You need to know about the call and you need to know about the stock.

Then, you need to execute your trade.

The Call:

One covered call requires you to own 100 shares of a company.   Each call includes premium income, strike price and duration.  You will receive money (premium income) in exchange for agreeing to sell your 100 shares of stock at a set price (strike price) and the obligation expires on a set date (duration.)  The PSX call illustrated above created $2.10 of income (the premium): the strike price is $70.00 and the obligation expires May 18, 2013 or 74 days from today.  

I always want the premium income yield to be at least one percent.  I use the covered call calculator illustrated above to quickly determine if the call income is enough for me.  In this case the income will yield me three percent.

I always like the strike price to deliver a gain above my cost basis.  In the PSX trade, I bought today at $65.60 so that is my cost basis.  The strike price of $70 is a gain of 9.29%.

I rarely sell a call with a duration of more than 90 days.   In this case the duration is 74 days.

The Company:

PSX is a company that pays a dividend and is otherwise solid.  These are companies I am looking for.  Plus, PSX make a ton of earnings. 

Marathon Pet MPC
April $ 95
Strike Price
Cost Basis
Call Premium

Gain in $ if assigned
Call Yield
Gain Yield

The company I seek does not have to meet all the conditions of a dividend machine but it does have to be strong enough a company that if I am stuck with it, I will at least get income on my investment in the form of a dividend...

Another covered call I sold today was Marathon Petroleum, MPC.   Using the covered call calculator, you can see the premium income of $1.25 is equal to a yield of 1.32%.  The strike price of $95 would be an 8.54% gain on my cost basis of $88.14.  The duration of this call is 46 days.  It expires on April 20, 2013.

Once you sell a call on a company, you have to hold that stock at least until the end of the call period.  If the stock price exceeds the call strike price, the buyer of your call will most likely also buy your stock.

On the other hand, if the stock price at the end of the duration of the option is less than the option strike price, the call buyer will not buy your stock and you will still own it.   You can then decide to sell the stock or keep it.   Often times, you can sell another call on your shares.  You may not be able to find a call that you like and you are stuck with a company that may be worth less than what you paid.   You certainly want to get income as you wait the company to improve.  This is why it is important to understand both the call and the company.

Execute the Trade:

I buy the stock first and then sell a covered call on the shares I bought.  

This post illustrates two stocks I bought today and then sold covered calls.


Update 3/6/3013  another example of a covered call see the covered call calculator on QCOM.

Qualcomm QCOM
May $72.50
Strike Price
Cost Basis
Call Premium

Gain in $ if assigned
Call Yield
Gain Yield
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