OXY

Occidental Petroleum Corporation

58.85
USD
2.31%
58.85
USD
2.31%
21.62 74.04
52 weeks
52 weeks

Mkt Cap 53.71B

Shares Out 933.74M

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Occidental Petroleum: Copy Buffett Using Options, 61% Annualized Yield

Summary Occidental Petroleum's share price has more than doubled in 2022. Energy stocks have been on a tear this year, with many analysts calling for a structural multi-year bull run in the commodities markets. Last week, as equity prices were collapsing around the world, Warren Buffett continued to add to his OXY position. Our article highlights a synthetic way to copy Buffett's actions, where an investor can obtain a 10% discount to the current stock price or obtain a 61% annualized yield. This article covers Options from our suite of products - we focus on macro portfolio allocation, CEFs, and yield producing options strategies, targeting overall returns of 9%+. Energy stocks have been on a tear this year, with many analysts calling for a structural multi-year bull run in the commodities markets. After taking over Anadarko Petroleum Corporation in 2019 and taking on significant debt, Occidental Petroleum (NYSE:OXY) saw its share price collapse in 2020 with an equity price that reached below $10/SHARE. The subsequent internal drive for efficiencies and the tremendous recovery in oil prices have driven the OXY shares higher, surpassing earlier this year their 2019 pre-acquisition price level. Last week, as equity prices were collapsing around the world, Warren Buffett, an icon of underwriting long-term value businesses, continued to add to his OXY position. Occidental is now making new 52-week highs, and while a retail investor might be hesitant to copy Buffett and add exposure to OXY outright at these levels, the investor will find below a more conservative path to taking a long position through our cash covered put strategy. This article discusses how a retail investor can take advantage of the high volatility displayed by the OXY options chain and take a synthetic long position in the stock, copying Warren Buffett's trade, but with less risk. Performance The stock is now finally above its pre-acquisition level exhibited in 2019: A savvy investor needs to keep in mind however that the OXY share price is nowhere near its historical highs, with the tremendous damage done to its balance sheet by the Anadarko acquisition compounded by the Covid crisis: On a 10-year basis the stock is still down from its historic highs, with the Anadarko acquisition undertaken at a sub-optimal time driving a significant drawdown during Covid. If you are looking to copy what Warren Buffett is doing but are hesitant to buy at these high price levels, then one can look into utilizing cash covered puts. The high volatility that has accompanied the OXY share price move has increased options premiums as detailed by Market Chameleon: In the picture above one can find the July 15, 2022 options chain for OXY at various strike levels. Our proposed trade is an at-the-money July 15, 2022 cash covered put as detailed below: This simply means that instead of buying OXY outright now, an investor can sell a July 2022 put, and if the stock price declines below the current value, then the purchase price will end up being $60.75/SHARE, which is a 10% discount to the current spot value. If the OXY equity price keeps increasing then said investor would realize a gain of $6,750 which translates into a 61% annualized yield (the respective cash sum is gained during the next 59 days). Scenario 1: The OXY share price decreases below $67.5/SHARE on July 15, 2022 the put is in the money and the shares get assigned to the investor the investor ultimately buys 100 shares of OXY at a price of $60.75/SHARE (strike price minus premium) the purchase price is approximately 10% lower than current spot levels Scenario 2: The OXY share price increases above $67.5/SHARE on July 15, 2022 the put expires without being triggered the investor realizes a cash gain of $6,750 which represents a 61% annualized yield on the maximum cash the investor would have held the investor can keep rolling the strategy for the rest of the year Conclusion Being long energy stocks has been a very profitable endeavor in 2022. Occidental Petroleum represents a cautionary tale of value destruction through an ill-timed acquisition. With a much healthier balance sheet helped by significantly higher oil prices, OXY has outperformed in 2022. Warren Buffett, an icon of value investing, has kept adding to his OXY position even as the world stock markets were in a risk-off mode. An investor looking to replicate Warren's actions but being hesitant to buy OXY outright at 52-week highs can use a cash covered put strategy to achieve a less risky result. In our proposed trade, selling a cash covered July 2022 put on OXY shares can either result in buying the stock at a 10% discount to current levels, or in a gain that translates into a 61% annualized yield. Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Comment

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