Breaking News
Investing Pro 0
NEW! Get Actionable Insights with InvestingPro+ Try 7 Days Free

Bullish On Suncor Energy? A Cash-Secured Put Option Could Make Shares Cheaper

By (Tezcan Gecgil/ )Stock MarketsJul 07, 2021 13:58
Bullish On Suncor Energy? A Cash-Secured Put Option Could Make Shares Cheaper
By (Tezcan Gecgil/ )   |  Jul 07, 2021 13:58
Saved. See Saved Items.
This article has already been saved in your Saved Items

Suncor Energy (NYSE:SU) is one of Canada's largest integrated energy companies that operates "across the entire petroleum value chain—from oil exploration and production to transport, refining and marketing."

In terms of crude oil storage in Canada, it has more than a 50% market share. In addition, its refineries are among the most efficient.

So far in the year, Suncor shares returned over 42% and hit a multi-year high in mid-June. Investors have been pleased with the Q1 results announced on May 3. Analysts concur the business should continue to generate strong free cash flow. As we start the second half of 2021, inflation expectations remain high, and provide tailwinds to a bullish outlook on the energy sector.

Therefore, today, we look at SU stock to see how investors could consider selling cash-secured put options on the company. Such a trade could especially appeal to those who want to receive premiums (from put selling) or to potentially own Suncor Energy shares for less than its current market price of $23.72, as we write on Tuesday. In terms of 12-month price forecasts, the median target is $29.

Suncor Energy Weekly Chart.
Suncor Energy Weekly Chart.

We previously discussed the detailed mechanics of cash-secured put selling using ExxonMobil (NYSE:XOM) stock. Readers who are new to put selling may want to consider reviewing that article.

Selling Cash-Secured Puts On SU Stock

Investors who write cash-secured puts are typically bullish on a stock like Suncor Energy during the timeframe that extends to the option expiry date. They generally want one of two things. Either to:

1. Generate income (through the premium received by selling the put), or

2. Own the stock, but find the current market price per share (i.e., $23.72 for SU now) higher than what they'd like to pay.

One put option contract on SU stock is the option to sell 100 shares. Cash-secured means the investor has enough money in the brokerage account to purchase the security if the stock price falls and the option is assigned.

This cash reserve must remain in the account until the option position is closed, expires or the option is assigned, which means ownership has been transferred.

Let's assume an investor wants to buy SU stock, but does not want to pay the full price of $23.72 per share. Instead, the investor would prefer buying the shares at a discount in the next six to 10 weeks.

One possibility is to wait for Suncor Energy stock to fall, which it might or might not do. The other possibility is to sell one contract of a cash-secured SU put option.

As a result, the put seller would take on the obligation to potentially buy 100 shares of SU at a certain price (the strike price) by the expiry date, and get paid a certain amount of premium now for taking on that obligation.

So the trader would typically write an at-the-money (ATM) or out-of-the-money (OTM) SU put option and simultaneously set aside enough cash to buy 100 shares of SU stock.

Let's assume the trader is putting on this trade until the option expiry date of Sept.17. As SU stock is currently $23.72, an OTM put option would have a strike of 23. The seller would have to buy 100 shares of SU at $23.00 if the option buyer were to exercise the option to assign it to the seller.

The SU Sept. 17, 2021, 23-strike put option is currently offered at a price (or premium) of $1.23.

An option buyer would have to pay $1.23 X 100, or $123 in premium to the option seller. This premium amount belongs to the option writer (seller) no matter what happens in the future, i.e. until or on the day of expiry. This put option will stop trading on Friday, Sept. 17, 2021.

Risk/Reward Profile For Unmonitored Cash-Secured Put Selling

Assuming a trader would now enter this cash-secured put option trade at $23.72, at expiration on Sept. 17, the maximum return for the seller would be $123, excluding trading commissions and costs.

The seller's maximum gain is this premium amount if SU stock closes above the strike price of $23.00. Should that happen, the option expires worthless.

If the put option is in the money (meaning the market price of SU stock is lower than the strike price of $23.00) any time before or at expiration on Sept.17, this put option can be assigned, and the seller would be obligated to buy 100 shares of Suncor stock at the put option's strike price of $23.00 (i.e., at a total of $2,300).

The break-even point for our example is the strike price ($23.00) less the option premium received ($1.23), i.e., $21.77. This is the price at which the seller would start to incur a loss.

On a final note, the calculation of the maximum loss assumes the put seller was assigned the option and purchased 100 shares of SU at the strike price of $23.00. Then, in theory, the stock could fall to zero.

If the put seller gets assigned the option, the maximum risk is similar to that of stock ownership but partially offset by the premium (of $123) received.

Bottom Line

Cash-secured put selling is a moderately more conservative strategy than buying shares of a company outright at the current market price. This strategy can be a way to capitalize on the wild swings in SU stock with a measure of prudence.

Those investors who end up owning SU shares as a result of selling puts could further consider setting up covered calls to increase the potential returns on their shares. In other words, selling cash-secured puts could be regarded as the first step in stock ownership. Once the investor owns 100 shares of SU, s/he would be entitled to dividends (current yield at 2.8%) and would also be able to sell covered calls.

Bullish On Suncor Energy? A Cash-Secured Put Option Could Make Shares Cheaper

Related Articles

Bullish On Suncor Energy? A Cash-Secured Put Option Could Make Shares Cheaper

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Our Apps
© 2007-2022 Fusion Media Limited. All Rights Reserved.
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
  • Sign up for FREE and get:
  • Real-Time Alerts
  • Advanced Portfolio Features
  • Personalized Charts
  • Fully-Synced App
Continue with Google
Sign up with Email