Profiting from High Gas Prices with Covered Calls: Stock Tips

Everyone is wondering what to do about high gas prices. Smart investors are taking high-octane action, selling covered calls on energy companies from big oil to wind and solar enterprises. Think about it. High gas prices are good for covered calls. High gas prices put the squeeze on companies that rely heavily on gasoline or diesel fuel to do business like trucking companies, or gas powered ocean transporters. This may cause their stock to remain static or drop. If market conditions do not permit increased prices, then profits may diminish or the labor force may have to be cut, which could also force stock prices downward. If you are long transportation stocks, like Old Dominion Freight Line (ODFL), write covered calls to protect against downward price moves. As long as the call's strike price is higher than the underlying stock, it won't be assigned, and when it expires, go ahead and write another one. You can do this monthly; your premium offsets "paper losses". In the long term you should come out ahead.

You can take advantage of upside price moves too, and even purchase shares at a discount. How? Buy and write covered calls on a stock like Schlumberger (SLB), which has a breadth of services including exploration, development and production. Likely to take advantage of the current resurgence of exploration in the petroleum industry, it is currently approximately $100 a share. If you buy it now and sell a June call to open with a strike price of $100, you receive a premium of $320, effectively reducing your purchase price to less than $97 per share. And when the stock moves up, you can and should close out your $100 call and "roll up" by writing another at a higher strike price for additional revenue. Other good covered call writes would be Swift (SFY), and Valero (VLO). These all have good upside potential, as does Devon Energy (DVN), and a gas-oil pipeline company Enbridge (ENB). Remember to monitor price moves and roll up calls accordingly, to avoid being called.

Alternate fuel sources may be a good play for covered calls as well, even if they don't appreciate in the near term. Many people feel that the sun will ultimately rise and play the largest role in providing energy, so look at solar stocks. Companies such as Energy Conversion Devices (ENER), which produces energy saving light bulbs, and Suntech Power Holdings (STP), a global leader in solar energy, show sunny future promise. In the meantime, investors can earn rewards with option premium income. If the stock's price does not advance, the calls just expire and you keep the premium month after month, like a monthly dividend. Some dividend huh?

Although no investment is 100% guaranteed, covered calls can hedge your bet and make you income while gas prices are high. The gasoline market is not predicted to improve for quite some time. So either take advantage of the static or downward prices or dive into companies that provide alternative energy and ride the upward long-term wave.

Sources:

http://blog.poweropt.com/2007/02/08/jim-cramer-talks-up-schlumberger-slb-in-online-video/

http://finance.yahoo.com/

http://www.poweropt.com/cchelp.asp