Coterra Energy Call Aims For 6.7% Return

Crude oil is trading at a six-month low, down 28% from highs above $120 per barrel in March to $88 today for a barrel of the West Texas Intermediate variety. Despite the big drop, oil is still up 42% from one year ago, and companies throughout the energy patch are still pumping very profitably.

This trade is a buy write that aims to earn 6.7% over the next five weeks on exploration and production company Coterra Energy (CTRA), which was just added to the Forbes Dividend Investor portfolio this week.

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Coterra Energy (CTRA) – Buy Write

Buy 100 CTRA

Sell to Open 1 September 23 $31 Calls

Execute for Net Debit of $29.05 or lower

Houston, Tex.-based Coterra Energy (CTRA) is a value stock play that is ultimately dependent upon crude oil and natural gas prices maintaining their loft. Coterra has domestic U.S. projects in the Permian Basin, Marcellus Shale, and Anadarko Basin. The company dates back to 1989 and adopted its “Coterra” name following the October 1, 2021 merger of Cabot Oil & Gas with Cimarex Energy.

Revenue this year compared to last is expected to jump 141% to $8.59 billion, with earnings higher by 121% to $4.97 per share, giving CTRA a price-earnings ratio of 5.8, 60% its five-year average forward P/E or 14.4. It also trades at a 36% discount to its five-year average price-sales ratio, and 30% below its average price-to-cash flow ratio. Free cash flow per share of $3.10 over the past 12 months is up 109% since 2019. It is worth noting that billionaire investors Ken Fisher and Stanley Druckenmiller have stakes in Coterra.

The next round of dividends and earnings reporting does not roll around until November. We will buy the stock and write September 23 (weekly) calls.

Here is the buy write: Buy 100 CTRA ($30.25 current price), and sell to open one contract of $31 September 23 calls. Placing a combined buy write order, use a net debit of $29.05 or lower. This “net debit” is the price paid for the stock, minus premium earned for selling the calls.

If CTRA closes above $31 on September 23, we would earn $1.95 per share on $29.05 at risk, or 6.71%. Over a holding period of 36 days, that would be an annualized return of 68%. If CTRA closes at or below the $31 strike price at expiration, we keep the premium and the stock, and continue to own it at a cost basis of $29.05 per share.

Options income for this trade: We earn $120 selling 1 CTRA September 23 $31 call contract. Click here for updated bid-ask and return characteristics.

John Dobosz is editor of Forbes Dividend Investor, which provides a weekly portfolio of high-yielding, value-priced income stocks, REITs and MLPs, and Forbes Premium Income Report, which sends out options-selling trade recommendations on two dividend-paying stocks every Tuesday and Thursday.

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