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.
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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