How to Juice Your Returns in a Rangebound Market Using Options

When the macro tealeaves are murky a commodity investor has got to get creative to juice returns. Rangebound markets can deliver attractive returns, you just have to know where to look.

Investors are currently faced with strong industry and economic crosscurrents.

On one hand you have record low capital investment, discoveries and inventories, typically bullish for commodity stocks.

While on the other hand, we have rapidly rising interest rates, slowing economic growth and falling availability of credit, all potential challenges to energy and commodity demand.

The push and pull of positive and negative fundamentals has resulted in flat returns for broad commodities since Q4 2021. There’s a high probability that commodity prices could remain rangebound over the coming quarters as the market continues digests the macro crosscurrents.

However a rangebound commodity market doesn’t have to equate to zero returns for commodity stocks…

In our inaugural post on Research & Quant, we showed you how to get paid to wait for higher commodity prices by choosing high quality, sustainable dividend paying stocks.

This strategy has paid off substantially thus far with the top decile of sustainable dividend stocks outperforming the oil & gas index by 11% since the report was published. While the index was rangebound, owners of sustainable dividend yielding stocks walked away with a 10% return in just over 2 months… not too shabby at all.

Top Decile of Dividend Stocks vs. US Energy Index (XLE)

Yet dividends aren’t the only way to generate juicy yields while commodities remain in a holding pattern.

You can also generate substantial returns using stock options.

This is the focus of today’s post.

Here is a summary of what we cover below:

• Low risk call and put option strategies to generate yield and protect stock positions from a market selloff

• Which oil & gas options pay the most on a relative and absolute basis

• How options let you generate up to a 14% annual return even if a stock goes nowhere.

• The cheapest way to protect against a 30% selloff in energy stocks

• Explanation of how options work

• Livestream login details where we will answer any questions you have on the report or about options in general.

Without further ado…

Options vs Dividends: What’s the Difference

*You can find a glossary of option terms at the bottom of this article for reference*

When used optimally in a rangebound market, an option overlay (meaning you own the stock as well) can generate similar or better yield over simply owning a dividend paying commodity stock.

Selling call options on a non-dividend paying stock, either small cap or growth focused, can generate the same yield while letting you own a stock with more leverage to rising commodity prices. The important caveat is that your capped on your upside beyond your call price.

Buying put options can protect you from the downside risk that comes from owning commodity stocks into a recession, leading to a higher total return as the put offsets your short term downside while you still can harvest all of the upside on the rebound by holding the underlying stock through it all.

In today’s study we look at two different yield generating strategies

• Sell a 6 month covered call 20% out of the money

• Sell a 6 month covered call 30% out of the money