To say that the gold mining sector has underperformed over the last 3-4 years is a significant understatement. The sentiment in the group has never been more negative as some darling gold miners have lost more than 90% of their value. Yet, in that environment, one gold company has been able to stand strong like the Rock of Gibraltar - Franco-Nevada.
Franco-Nevada is a gold-focused royalty company. Instead of developing and operating mines, they focus on a diversified portfolio of royalties from highly favourable properties. This has allowed the stock to materially differentiate itself. There unique business plan, has over the last few years been tested against some the most perilous market conditions, and the company has thrived. This includes the stock testing all time new highs at the start of the 2015 year.
While I am not interested in cheer-leading the stock, it was solely my objective to differentiate Franco-Nevada from the overwhelmingly negative sentiment overshadowing the entire gold and silver mining sector.
While virtually flat on the year in regards to performance, the stock has experienced considerable volatility having traded as high as $74.00 and as low as $50.00. At its current price of $58.75, the stock is sitting pretty close to the mid-point of its year range. From my perspective, this is a perfect stock for investors seeking covered call income. The stock has proven to be able to weather the storm and continue to deliver to investors. At the same time, the volatility offers the potential for covered call income worthy of consideration.
In the example:
- Investor buys 1000 shares of Franco-Nevada at $58.75 for $58,750.00.
- Investor sells 10 April $60 strike covered calls for $5.60 or $5,600 in cash proceeds.
What has the investor accomplished?
The investor has generated a 9.53% cash flow for the obligation to potentially have to sell the stock at $60.00 over the next 6 months. That is close to a 20% annualized premium. While the risk of an early exercise is a possibility, the investor is likely to enhance that income return with the 1.90% dividend the company pays annually.
In addition, if the stock was to decline while the investor is holding it, the stock would need to decline below $53.15 in order for the investor to be in a loss, when taking the premium income into consideration.
If the investor was to be exercised and the stock was sold at $60.00,the investor would have realized a 11.66% realized gain in just 6 months.
In today’s market environment, where it is hard to find any safe haven, or any sound income, a covered call on Franco-Nevada may be a respectable consideration.
I was reviewing the most active options widget found on the M-X website and came across Air Canada (TSE:AC). Unusual or increased options activity can indicate the potential for some action in the underlying stock.
My next step was to take a look at the news to see if there was any indication as to why there might be an increased interest in the shares. Interestingly enough, CNW Group, a news wire company, published a story entitled “Air Canada Buys Back 3,185,735 Shares at a Total Cost of 36.7 Million” Read full story here. This article was picked up by the likes of Yahoo Finance, MarketWatch and several other outlets.
Below is the quote that likely moved investors to act:
“Air Canada believes that, from time to time, the market price of its Shares may not fully reflect the underlying value of its business and future prospects. In such circumstances, Air Canada may purchase for cancellation outstanding Shares, thereby benefiting all shareholders by increasing the underlying value of the remaining Shares.” Source: Isabelle Arthur of Air Canada Corporate Finance
While the number shares repurchased only represents about 3.49% of shares outstanding, this kind of corporate action can lead to greater investor confidence and a subsequent interest in owning the shares.
When a story that centers around corporate fundamentals suggests an opportunity, I always like to add credibility by comparing the technicals. Afterall, we are dealing in a world of probabilities so the more evidence supporting a directional bias, the higher the probability that there will be a follow through.
With this in mind, the below chart does offer some evidence of a bullish opportunity as indicated by my annotations:
1. Support at long term major trend line
2. Break above 200 bar moving average
3. Bullish flag forming (wait for break above upper trend line to confirm)
Given the general or systematic risk in the market these days, using a call option to take a shot at the possibility of move higher is a great strategy. If shares of Air Canada (TSE:AC) continue higher, the investor can benefit from the increased value in the option or exercise their right to own the shares at the strike price selected…provided the stock is trading above it. However, if Air Canada shares fall victim to broader market weakness, the loss on the call option is defined and limited to the premium paid. Unlike the owner of the shares who assumes an unidentifiable and unlimited risk should the shares decline in value.
With the shares currently trading at $12.10, an investor could purchase a January 2016 call with a strike price of $12.00. The Ask price for the call is $1.65. This represents the maximum risk on the position. The break even on the trade is reach when the shares are trading at $13.65. This is determined by simply adding the cost of the call to the strike price. The investors expectation should be that the shares will be trading above this level. According to the Financial Times, the average 12 month price target of analysts polled is $18.13 See full details here. Remember, this is no guarantee, but does offer some insight.
To conclude, the most active options “widget” found on the M-X.ca home page is a great resource for ideas. However, you need to do your homework to ensure that the company fundamentals and further technical analysis support taking action.
The last two weeks have seen material volatility as we had a serious market decline and substantial rebound in stocks. Much of the blame has been pointed toward China, but there is no denying the material declines in all global markets. The VIXC, which is the Canadian measure of implied volatility on the Canadian markets spiked intraday to 38.14, which is the highest reading since the market crash in August and October of 2011.
Back in both 2010 and 2011, these types of spikes in the VIXC marked the capitulation phase of the market decline and lead to intermediate bottoms in the markets which proved to be great buying opportunities for investors.
So the question on all investors minds – is this a buying opportunity again?
While I always heed to the more cautious side of the outlook, I remain initially sceptical. There are a number of precipitating factors that differentiate this situation from 2010 and 2011. In both the cases of the 2010 crisis in Europe and the 2011 U.S. Debt Ceiling crisis, the problems were abroad and Canadian stocks were simply caught in the tide of global uncertainty. 2015 is shaping up to be a far different situation. The Canadian markets are overshadowed by a plunge in commodity prices driven by a global slowing of growth. This is overshadowed by broad deflationary pressures.
The scenario has now made the announcement off a technical recession almost a certainty, leaving many question marks as to if the heavily indebted Canadian consumer can withstand the fallout. The key question that needs to be answered, which has yet to reveal itself lies in concluding if the:
Canadian stock market is simply in the midst of a correction or is it in the midst of a bear market!
This is why rushing to buy this dip can prove to be a bear trap.
In a number of our prior blogs, we have advocated the purchase of protective puts to reduce a portfolio’s volatility. That was in a period where the options were relatively cheap. Today, the material rise in the VIXC is reflecting the new expectations for increased volatility, making the puts far more expensive at a time when the market has already considerably dropped from its year highs.
For those that remain pessimistic over the short-term, the collar strategy represents a volatility neutral strategy where the increased covered call premiums are helping finance the more expensive put premiums. Overall, there is a diminishing payoff in further hedging, but may still have merits, particularly if investors need the psychological reassurance on limiting risk.
Individuals invest for many reasons. Investing being the key word in that sentence. Investing is about making medium to long term commitments with a specific goal in mind. And it is more than simply saying I want to make money!
In fact setting an objective can be the hardest decision individuals make. I should know I have spent twenty years as a money manager trying to get people to think about goals, risk management and time lines. And then to look at securities in terms of what they bring to the overall portfolio in terms of risk and potential return.
Generally speaking, capital appreciation is the most commonly cited objective. Yet, when you examine where you are in your life cycle, capital appreciation may not be the appropriate choice. Retirees for example, should be seeking income that they can draw from their portfolio.
To that point, options can play a role. Covered call writing that is often talked about in this space is an important income enhancement strategy that produces tax-advantaged income. So do dividends which should be a focus for income producing investors. The trick is to stay focused on the income being generated from the dividends rather than noise induced swings in the value of the shares.
With that in mind I wanted to look at options enhancements using stocks that pay above average dividends. The first is BCE Inc. the Canadian telecommunications giant. BCE Inc. (Symbol BCE, Friday’s close $53.76) is a mature company which is what makes it interesting for this strategy. Investors buy it for the dividend (current annual divided is $2.60 yielding 4.83%) not so much for the long term capital appreciation.
BCE also has a liquid options market which allows us to sell covered calls to further enhance the cash flow from this security. In this case, you could buy the shares at $53.76 and write the January 54 calls at $1.45. The six month return if the shares are called away in January is 5.56% including the two quarterly dividends that will be paid out during the holding period. Return if unchanged is 5.12%.
Another company with an excellent dividend is Algonquin Power & Utilities Corp. (AQN, Friday’s close $9.74). AQN is a renewable energy and regulated utility company providing regulated water, electricity and natural gas utility services.
Year-to-date, the share price has bounced between $8.50 and $10.50. The stock had a major setback in March when the share price fell from $10.20 to $8.50 in a matter of days. The result of a notice from CRA that the government intended to reassess the company’s 2009 through 2013 income tax filings in relation to a unit exchange transaction that occurred on October 27, 2009, whereby unit holders of Algonquin Power Income Fund exchanged their trust units on a one-for-one basis for common shares of APUC (the “Unit Exchange”).
Not to get into the nuts and bolts of government oversight suffice it to say smaller companies can be subject to shocks that are hard to forecast. Still, the shares have rebounded nicely from that point and the 5.177% dividend yield looks reasonably safe. AQN has options and with the choppy action earlier in the year, the premiums provide a reasonable buffer.
To that end, you could buy AQN at $9.74 and write the January 10 calls at 45 cents. Six month return if exercised is 9.14%, return if unchanged 6.47%. Both returns include dividends.
Despite the noise surrounding the recent price action in oil, nothing much has changed. Note our blog published January 23, 2015 (Has Oil Bottomed?) I posited that oil would likely remain in a trading range between US $40 and US $60 per barrel for 2015. So far that is exactly as it has played out.
Make no mistake this is a supply driven story with energy producing countries engaged in a race to the abyss. Revenue shortfalls in countries like Venezuela and Nigeria has caused civil unrest and political instability which may well lead to military coups. Saudi Arabia is behind the curve but has similar issues. The country will have to borrow significant funds in order to maintain the political handouts that have, so far, curtailed any major uprising.
Global demand continues to grow albeit at a temperate pace. Not surprisingly we are seeing robust demand from India whose economy typically thrives in a low cost energy environment. Bottom line global demand is not likely to cause any spikes in oil but it is strong enough to keep oil from falling below US $40 per barrel.
I suspect the pain at the US $40 price point would be enough to cause OPEC and US producers to significantly reduce output. Starring down the abyss has a way of crystalizing one’s thought process.
Energy companies that are bound within a relatively narrow trading range make for excellent covered call candidates. Particularly when buying shares at the lower end of the range and selling covered calls at the mid-point of the range. I posited the energy covered call strategy in January and made three recommendations which would have all been called away earning the maximum potential return.
I suggest we apply the same approach this time. Take a look at Suncor (TSX: SU recent price $36.93) where you buy the shares and sell the SU Dec 38 calls at $1.75. Another possibility is buying shares of Imperial Oil (TSX, IMO, $47.41) and writing the November 48 calls at $2.60.
Managing a Collared Position
DEFINITION OF ‘COLLAR’
1. The purchase of an out-of-the money put option is what protects the underlying shares from a large downward move and locks in the profit. The price paid to buy the puts is lowered by amount of premium that is collect by selling the out of the money call. The ultimate goal of this position is that the underlying stock continues to rise until the written strike is reached. (investopedia.com)
I wanted to dedicate this blog to exploring the choices investors have when managing an existing collar position after a stock has moved considerably lower. For this example, we have no better opportunity to debate the alternative choices, than using the Canadian Pacific collar example we published in our March 30th post. Click to read: http://optionmatters.ca/blog/2015/03/30/have-the-rail-stocks-been-derailed/
Back in March I was expressing my concerns about the impact the oil industry would have on the Canadian railway stocks and expressed concerns about the short term risks in the stocks. In particular we focused on the Canadian Pacific Railway which at the time was trading at $229.24. Here is the trade that was opened:
-investor has owned the CP shares for many years and has a considerable capital gain if the shares are sold
- The stock is trading at $229.24 (March 27th, 2015)
- Investor buys the October $230.00 put for $17.50 or $1750.00 debit for every 100 shares
- Investor then proceeds to sell an October $255.00 covered call for $7.50 or $750.00 credit for every 100 shares
- The net cost of the collar is $10.00 or $1000.00 for every 100 shares
Currently as we write this blog, Canadian Pacific Railway is trading at $198.00 (July 9th 2015). The investor has successfully secured the $230.00 sale price out to October. While the investors shares are over $30.00 lower in price, the net value of the options collar is $32.50 (the protective put is worth $33.00 and the covered call is valued at $0.50). With the stock and options combination having almost no time value remaining, the position is virtually delta neutral. Further to that, the protective puts delta is very close to -1, which means that almost all further downside risk that the stock may experience is entirely hedged.
So what should our investor do?
First off, the investor does not have to do anything immediately as the collar position was opened out to the October expiration. But it is worth discussing the choices the investor has if they felt compelled to act.
In the first scenario, the investor feels that the Canadian economy will continue to struggle and that railway stocks are vulnerable to sustained weakness. If the investor simply would like to close the position, they can sell the stock and the options having hedged the drop beyond the cost of the collar.
Alternatively, what if our investor was bullish and felt that this 20% decline in the stock from its highs was just an opportunity. Under that situation, the investor can position themselves to monetize the money made on the put protection to reduce the investors average cost base. When an investor elects to do this, they can always purchase a new, lower strike put as protection. Let’s demonstrate as an example:
- the CP shares are trading at $198.00
- Investor sells to close the October $230.00 put for $33.00
-Investor buys to open the October $190.00 put for $7.00
The investor has extracted a $26.00 net debit from the options which they use to reduce the average cost base (breakeven) of their original position. In addition, the investor now has 100% of the upside of the stock and has a new protection in place to remove all risk below $190.00 a share.
As stated above, the investor can simply do nothing and defer making a decision until October, but dependent on their expectations on the stock, it may be appropriate to take action when and if it is timely to do so.
- Posted by Patrick Ceresna on August 1, 2015 filed in Options Market, Trading Strategies
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Before we get into the juicy numbers of the options trade, it is important to put some perspective on Teck Resources and where it is at. Teck Resources is one of Canada’s premier basic material stocks. The company has global operations in copper, coal, zinc, lead, molybdenum, gold, silver and various chemicals/fertilizers. The recent drop, (more like crash) in commodity prices has challenged its growth and earnings, driving the stock to lose close to 50% of its market value over the last 3 months.
Ouch to say the least. Here are the current facts:
- Though there has been a contraction of earnings, the company is currently still profitable
- The company pays a nice dividend, but with a 152% payout ratio (source: yahoo finance), implies that the dividend is at risk of being reduced or cut all together
- From its $20.58 February high, TCK.B has materially dropped, hitting a $8.77 low in July
With the full understanding that the stock is now pricing in an array of risks, an investor willing to undertake those risks has an interesting income opportunity using a long-term covered call.
Covered Call Strategy:
The Covered Call Strategy involves buying (or owning) the shares of a stock and selling (to open) a call option against the stock. A short call generates an income (equivalent to the option’s premium received) with the obligation that the investor must potentially sell the stock at the strike price throughout the life of the option, if he or she is assigned.
Here is an example of the strategy, with an investor buying 1000 shares:
- Buy 1000 shares of TCK.B ($9.35 on July 30th 2015) or $9,350.00
- Sell (to open) the long-term January 2018 $9.00 covered call (bidding $3.35 July 30th 2015) or $3,350 credit
- The investor has to outlay $6.00 ($9.35 - $3.35) or $6,000 to open the trade
- The investor has now an average cost base or break-even of $6.00 with an obligation to potentially have to sell the stock at $9.00 over the next 30 months to January 2018
- In addition, over those 30 months the investor will collect any dividends the company continues to pay
What is compelling about this trade is that the investor can make 50% return without the stock having to actually go up in price. How? Let’s review.
Our investor has outlaid $6,000.00 that, if exercised would be sold at the $9.00 strike or $9,000.00 for a $3,000.00 gain. While 30 months is a long time, how many investors would consider gaining this type of return without needing a stock to appreciate in value?
In all fairness, let’s present the risk scenario. For the illustration purposes, let’s assume that the commodity markets continue to deteriorate and Teck Resources loses a further 50% of its value and drops from $9.35 to $4.67 while our investor owns the shares. Under those circumstances, the investor is losing paper profits as the stock has dropped $1.33 (or 22%) below their $6.00 break-even. While that would be a disappointment, it is not remotely as severe a loss as an investor that purchased the shares outright at $9.35 and held as a buy and hold investor.
While this trade may represent too much risk for some, others that like the company and believe the prices at these levels are attractive can make a very handsome return if proven right.
Probably the most noteworthy event in the first half of 2015 was the surprise rate cut issued by the Bank of Canada (BoC) in the first quarter. It was designed to provide “insurance against a downturn” in light of the sharp decline in oil prices.
The BoC was right to be concerned. Unfortunately policymakers underestimated the impact lower oil prices would have on the Canadian economy. GDP was negative for the first half of the year and is closing in on recession territory.
Most of that weakness was the result of an abrupt decline in business investment particularly within the energy and commodity sectors. Precious metals, base metals and textiles are all down on the quarter which economists attribute to slowing global demand and a strong US dollar. The latter point is particularly relevant as there is typically a high correlation between commodities and the greenback.
The challenge for many investors is syncing the positive employment numbers (unemployment holding steady at 6.8%) and inflation data which is within the BoCs’ 2.0% target. However when you take away the volatile food and energy components, core inflation is closer to 0.9%.
Unfortunately both of these metrics are lagging indicators. It is only be a matter of time before the effects of an economy moving away from its potential shows up in this data series. That is unless there is a change in business conditions or some kind of intervention by the BoC.
Like others I was of the opinion that Canadian manufacturing would pick up due to lower oil prices softening the impact lower energy prices would have of the economy. That has not played out as expected for reasons that have longer term implications.
The US has been gradually shifting more of their business to Mexico. While a stronger USD makes Canadian goods more competitive, those same forces are amplified when applied to the decline in the Peso. Couple that with lower labor costs and Mexican exports are simply more competitive.
To put some meat on this skeleton Canada’s share of US imports from North America has fallen from 75% in the 1990’s to 50% this year. The end result is that Canadian exporters will benefit from a weaker loonie and a strengthening US economy but its’ impact will be less than in previous expansions. So despite the view that a rising tide lifts all boats it looks like Canada will be getting a smaller piece of a bigger pie.
With respect to interest rates the BoC like their counterparts in the US, have stated that any decisions on interest rates will data dependent. Considering weak GDP data, lackluster business outlook, low inflation and weak manufacturing data one could surmise that another rate cut may be in the offing. Perhaps sooner than later.
One way to play Canada is to look in the consumer staples sector and search for companies that have a domestic focus. One that comes to mind is Alimentation Couche-Tard Inc. (TSX: ATD.B, recent price $58.00). This company operates a chain of convenience stores most of which are located in Quebec. Buying the ATD.B Feb 58 calls at $4.25 look interesting for aggressive traders.
I apologize for the title but I couldn’t resist. Valeant Pharmaceuticals International (TSE:VRX) continues to defy broader market complacency. The diversified pharmaceutical company has barely wavered in its price advance since August of 2014. While this trend may be getting a little long in the tooth, the question is whether there is a little more upside momentum to capitalize on. As of the close today (July 15, 2015) the shares have breached a historical high, closing at $304.67. Check out the chart below:
Now, if you think this stock is out of your price range, you may want to read on. I chose TSE:VRX to demonstrate how options can be used to take advantage of an expensive stock at a significantly reduced price. Let’s assume that we believe that the share price of Valeant (TSE:VRX) is likely going to re-test the previous high of $310.00 or perhaps higher over the next month. With the shares trading at $304.67 we may want to consider using a call option expiring in August with a strike price of $305.00. The last price for this option was $13.00 per contract. What an investor may want to take into consideration is that the short term target sits at $310.00. If the last price of the option contract ($13.00) is added to the strike price ($305.00), the break-even on expiration is determined to be $318.00. If the move happens quickly, it is possible for the long call position to be profitable. However, if the stock takes its time, or takes a detour, the probability of profiting is reduced. One way that we can lower our break-even point is by creating a Bull Call Debit Spread. This will lower the net cost of the trade and as a result, the break-even point.
The trade could set up as follows:
Buy 1 - August 305 Call $13.00
Sell 1 - August 310 Call $10.40
Net debit = $2.60
What we have effectively done is reduced the cost of participation even further by selling the out-of-the-money call and collecting the premium. While this limits the upside potential, the break-even point is now lowered to $307.60 which is determined by adding the newly adjusted cost of the trade to the 305 strike call.
In addition, the risk exposure has been reduced from $13.00 per share down to $2.60 per share. While the strategy has a limited upside, the investor has the potential to generate a 92% return on their risk should the shares be trading at or above $310.00 which is the strike of the written option contract.
This strategy is also an effective way to lock in profits on shares owned while continuing to participate in the stocks upside. Investors are often hesitant to sell their shares for a profit for fear that they may miss out on further upside potential. One solution is to sell the shares at a profit and replace stock ownership with the right to own the shares through the purchase of a call option or a Bull Call Spread.
The benefit of this is three fold:
-Investor locks in profits on shares owned
-Investor frees up capital to take advantage of new opportunities
-Investor may continue to benefit from further share appreciation with a limited risk exposure
I should mention that TSE:VRX is set to release earnings on July 23rd. An earnings report can have a very significant impact on the valuation of the company. This may not necessarily be in the direction of the primary trend. With that in mind, an option, or spread combination is a great way to trade your bias with a limited and defined risk exposure, especially on an expensive stock.
For the first half of 2015 global financial markets have been obsessed with short term noise. We have witnessed a succession of exacerbated reactions to on again off again negotiations with Greece, waste of time debates on the timing of a Fed rate hike or endless dissections of monthly jobs data where 20% revisions are more the norm than the exception. If we can gleam anything from the first half it is the wide chasm that exists between the drivers of long and short term returns. That has not always been the case. In a normal economic environment, GDP growth, interest rates and job creation are considerations that impact both long and short term decisions. In a normal economic cycle – unfettered by central bank manipulation - analysts are able to dissect macro data and calculate its’ trickledown effect on earnings the single most important input into equity valuation. Regardless of Ones’ time horizon! In an environment where central banks are manipulating the business cycle and skewing earnings short term traders in particular, seek out alternative strategies. Note the six year outperformance of momentum stocks which excel in a low interest rate low volatility environment. Within this group valuations are propelled by new twists on old themes (i.e. Tesla) new concepts (i.e. Netflix), promising new drugs (see the entire biotech space). The problem is that a parabolic growth trajectory often leads to bubbles that have a tendency to burst under pressure from higher interest rates and increased volatility. That’s why macro events like Greece have an inordinate amount of short term influence on financial markets. When Greece settles down short term traders will turn their paranoia to the timing of the Fed’s rate hike. Not that any of this should affect long term returns but it will lead to periods of heightened volatility that will eventually be reflected in higher option premiums. So like it or not we have to pay attention. To that end let’s engage in a quick study of a Greek tragedy. What seems to be lost in the narrative is how a Greek exit would affect Germany. One could argue that Germany needs Greece more than Greece needs the Eurozone. The problem is selling that position to the German electorate. If Greece leaves there will be a period – maybe two to five years – where there will be upheaval. The Greek central bank will print Drachmas to support the economy. We may see an inflationary spike and certainly Greek exporters will be hurt. On the other hand excursions to the Greek isles will be a bargain and in time the Greek economy will settle and output will return to levels that existed prior to its inclusion in the Eurozone. It’s a much larger problem for Germany which is a country highly dependent on exports. For the German economy to continue its growth trajectory it needs access to a large free trade zone with a weaker currency. The Euro being a weak sister to the powerful Deutsche Mark (DM). If Germany was forced to trade in DMs – the end result of a Eurozone break up - it would have a dramatic effect on German manufacturers and exporters. The problem is that German politicians cannot sell this position to its citizenry. Which means that any deal must include some austerity measures that are seen as real concessions. Greece is playing the same game but from the other side of the fence. The July 5th referendum is a sub-plot. A high stakes poker game with Greek politicians encouraging a “No” vote to give them a “Grexit” chip to improve their bargaining position. The risk is that a “Yes” vote makes it more likely other members of the Eurozone will call their bluff. I think it is highly unlikely that Greece will exit the Eurozone. Negotiations will continue regardless of the referendum outcome, cooler heads will prevail, measured concessions will be offered by the Greeks and accepted by the Eurozone, and another potential fire will be doused. Just in time for short term traders to re-focus their attention on the Fed. What this means is that the second half may unfold in much the same way as the first half. Range bound equity markets that from time to time experience short term bursts of volatility. Momentum stocks will continue to outperform assuming volatility spikes quickly abate and any interest rate hike that occurs in September or December will likely be the only one we see until 2017 or later. In a range bound scenario with intermittent short term volatility spikes covered call writing should be the ideal strategy. The problem is that low volatility makes it difficult to find opportunities that could be classified as “no-brainers!” One approach is to keep some cash on the sidelines and look for volatility spikes. You will see that during market sell-offs which I think will be buying opportunities and ideal for implementing a covered call or short put strategy. Another line of attack is to look for sectors that share similar range bound metrics but with above average volatility. The oil and gas sector delivers these characteristics as I believe oil will most likely remain between US $40 and US $60 per barrel. To that end you might consider a medium term covered call on Canadian Natural Resources (CNQ, recent close: $33.85). In this example buy CNQ and write the CNQ November 34 calls at $2.40. The five month return if exercised is 7.53%, if unchanged 7.09% and downside protection is $31.45.