BofA Securities Strategist Has Savvy December Options Overwriting Trade Ideas

If somebody had told you in March, at the height of the stunning 35% sell-off that happened in less than 30 trading days, that we would be staring at all-time highs across the board in December, you may have shaken your head in disbelief. The reality is, with 2021 just a month away, it makes sense to look at ideas that can generate safe total return without an undue amount of risk.

BofA Securities Equity-linked analyst Gonzalo Asis offers up some sensible option overwriting ideas. Writing or selling options on stocks you hold is a covered call strategy. Overwriting is a trading strategy that involves selling options that are believed to be overpriced, with the assumption that the options won’t be exercised before they expire.

Asis has pinpointed 10 stocks he feels can generate solid total return for investors in a trade that can be put on now and the options expire on December 18, in less than three weeks. We looked at the lower-priced stocks he picked, as that is easier for some investors from a capital perspective.

It is important to remember that no single analyst report should be used as a sole basis for any buying, selling or trading decision. In addition, while this is a safe options strategy, it is not suggested for those that are unfamiliar with options trading.
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Apache

This has long been considered an industry leader but its stock has been battered. Apache Corp. (NYSE: APA | APA Price Prediction) is an independent energy company that explores for, develops and produces natural gas, crude oil and natural gas liquids (NGLs). The company has operations in onshore assets located in the Permian and Midcontinent/Gulf Coast onshore regions, and offshore assets situated in the Gulf of Mexico region. It also holds onshore assets in Egypt’s Western desert and offshore assets in the North Sea region, including the United Kingdom.

Apache also has an offshore exploration program in Suriname. As of December 31, 2019, it had total estimated proved reserves of 551 million barrels of crude oil, 186 million barrels of NGLs, and 1.6 trillion cubic feet of natural gas. The company remains an acquirer/exploiter/explorer, fiscally conservative company that has grown its reserves and production consistently via acquisitions and organic projects.

The trade would involve buying Apache shares and selling the $14.50 strike December options, which closed Friday’s bid at $0.87, or $87 dollars per contract. The Friday close of $13.92 plus the option premium would produce a solid 10.4% gain if the shares were called away.

The BofA Securities has a Buy rating with a $23 price target. The Wall Street consensus target on Apache stock is $14.54.

Coty

Smart investors know that regardless of the economy, women will continue to buy makeup and fragrances, and this is a very solid play on that theme. Coty Inc. (NYSE: COTY) is number two globally in the fragrance category and number six in color cosmetics.

The company manufactures, markets, distributes and sells beauty products worldwide. It provides prestige fragrances, skincare and color cosmetics products through prestige retailers, including perfumeries, department stores, online retailers, direct-to-consumer websites and duty-free shops under the Alexander McQueen, Burberry, Bottega Veneta, Calvin Klein, Cavalli, Chloe, Davidoff, Escada, Gucci, Hugo Boss, Jil Sander, Joop!, Kylie Jenner, Lacoste, Lancaster, Marc Jacobs, Miu Miu, Nikos, philosophy and Tiffany brands.

Coty also offers mass color cosmetics, fragrance, skincare and body care products primarily through hypermarkets, supermarkets, drug stores, pharmacies, mid-tier department stores, traditional food and drug retailers, and e-commerce retailers under the Adidas, Beckham, Biocolor, Bozzano, Bourjois, Bruno Banani, CoverGirl, Enrique, Max Factor, Mexx, Monange, Nautica, Paixao, Rimmel, Risque, Sally Hansen, Stetson and 007 James Bond brands.

The trade would involve buying Coty shares and selling the $7.50 strike December options, which closed Friday’s bid at $0.45, or $45 dollars per contract. The Friday close of $6.89 plus the option premium would produce a huge 15.3% gain if the shares were called away.

BofA Securities rates Coty stock as Neutral with a $7.50 price target, which is well above the $5.50 consensus target.
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This stock was hit as oil prices tumbled, but it has rallied smartly recently. Devon Energy Corp. (NYSE: DVN) is an independent energy company that primarily engages in the exploration, development and production of oil, natural gas and NGLs in the United States and Canada. It operates approximately 19,000 wells.

The company also offers midstream energy services, including gathering, transmission, processing, fractionation and marketing to producers of natural gas, NGLs, crude oil and condensate through its natural gas pipelines, plants and treatment facilities.

Production is weighted toward crude oil while growth opportunities are liquids focused, anchored by the Delaware Basin, SCOOP/STACK, Eagle Ford Shale, Canadian Oil Sands, and the Barnett. Devon also owns equity in the publicly traded midstream master limited partnership EnLink.

The trade would involve buying Devon shares and selling the $15.50 strike December options, which closed Friday’s bid at $0.47, or $47 dollars per contract. The Friday close of $14.78 plus the option premium would produce a solid 8.05% gain if the shares were called away.

The $18 BofA Securities price target accompanies a Buy rating and compares to the $16.70 consensus target.
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Occidental Petroleum

This energy company made huge news with a Warren Buffett backed purchase of Anadarko Petroleum. Occidental Petroleum Corp. (NYSE: OXY) is an oil-levered multinational organization with principal business segments in oil and gas and in chemicals.

The oil and gas segment explores for, develops, produces and markets crude oil and natural gas, primarily in the U.S. Permian Basin, Colombia, Bolivia, Libya, Oman, Qatar and Yemen. Meanwhile, the chemicals segment manufactures and markets basic chemicals, vinyls and performance chemicals.

The shares have underperformed since the Anadarko acquisition was announced and after the company essentially eliminated the dividend. However, the stock remains a solid idea for investors looking to add energy to portfolios.

This overwriting trade would involve buying Occidental shares and selling the $17 strike December options, which closed Friday’s bid at $0.92, or $92 dollars per contract. The Friday close of $16.56 plus the option premium would produce a solid 8.21% gain if the shares were called away.

The shares are rated Buy at BofA Securities, with a $29 price objective, and the consensus figure is $12.73.
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It is important to remember that selling covered calls is not considered a risky options-related trade. However, selling option strikes so close to the current stock prices does increase the possibility of having the shares called away. With that in mind, many investors can buy the shares with no commissions and very low options commissions, which makes an 8% to 10% total return for three weeks a very solid gain.

In addition, the quoted bid prices for the options are very wide from the offer prices in some cases. It always makes sense to put a limit order to sell options higher than the bid if the spread is wide.