Damn, the market has been a bit surly lately hasn't it. On the plus side it's knocked about 10% off the price of Encana(ECA). Encana is a large natural gas producer that has been on my list of buys for awhile. If you're bullish on natural gas in America(and it's hard not to be with the fuel as cheap as it is right now), ECA is a great play. Instead of buying the stock outright though, I'm going to conserve some cash and take advantage of the current volatility by selling puts. Standard naked put trade here...if it recovers I keep the cash for a decent return on margin. If it keeps falling, I get to buy ECA at a discount to today's price.
I sold an October 27 put for ECA this morning for $1.31. At that price, our breakeven point for ECA is $25.69...an additional 7.5% below today's price. At that price ECA's dividend yield on my cost would be above 3%. If it expires worthless, I keep the $1.31 for a 21.4% return on margin in just 3 months. That's over 80% on an annualized basis!
- Sell to Open: One(1) ECA Oct 22 2011 27.0 Put @ $1.31
The Numbers
- Cash: +$131
- Short Option: -$135
- Margin: -$611
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