Is a 5% yield for ECA too good to be true?

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5% yields usually mean higher risk

ECA has a 5% yield going out to November expiration.  I do a show a couple times a week for the Options Insider Radio Network and there is a segment called the Odd Block.  Usually there are interesting trades and it highlights areas I might not normally look at.  ECA is just off of my radar as a Natural Gas producer that has managed to stick around and still pay a dividend from $2.25 per BTU gas.  I think this buy write is interesting.

Huge Call Volume makes a 5% yield in ECA data from Cboe Livevol

How to estimate a 5% call yield?

There was huge volume on the Nov15 $4 strike of around 33000 options.  My sense is that the paper direction was buy since the IV rose around 7 pts to 69% by the end of the day.  To find out what the yield is we need to do a little arithmetic.  The active price was .50 for the calls so 4.50 net for the $4 strike. Subtract the stock price, $4.28, and there is .22 left over or 4.5% yield to Nov. Ok, not quite 5% but the stock was up intra- day. .22 is not much but the name is only $4.0 and trading at multi-year lows.

Why is paper paying .50 for the calls

The question is why is paper paying .50 or over 10% of the underlying value for such a short period of time?  Takeover or other corporate action or maybe even a synthetic put?  At $4 the short/synthetic put concept does not make a lot sense.  While I realized we produce more Nat Gas then we can consume now, a buy write approach to names at this level might work. The stated book value for ECA is 7.19.  We got that going for us.  I will go for a taste on this tomorrow and see where it goes.

Disclosure- Long Nat Gas and Nat Gas stocks

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