Maximize Income with SM Energy’s Covered Call Strategy

Shareholders of SM Energy Co. (Symbol: SM) seeking to enhance income beyond the Stock‘s 3.5% annualized dividend yield can consider selling the August covered call at the $25 strike. By doing so, they can collect a premium based on the $2.40 bid, which annualizes to an impressive 33.5% return relative to the current Stock price. This can result in a total annualized return of 37%, assuming the Stock is not called away. It’s worth noting that any upside beyond $25 will not be realized if the Stock is called away; however, shares would need to increase by 10% for this to happen, allowing shareholders to still achieve a 20.6% return plus any dividends earned prior to the Stock being called.

Dividend payments are often unpredictable and can fluctuate with a company’s profitability. For SM Energy Co., reviewing the dividend history chart below may help investors gauge the sustainability of the recent dividend and assess the likelihood of maintaining a 3.5% annualized yield.

Trading History and Volatility Analysis

Below, you can see a chart displaying SM’s trailing twelve-month trading history, with the $25 strike highlighted in red:

This chart, along with the Stock‘s historical volatility, offers valuable insights when evaluating whether the August covered call at the $25 strike is a sound strategy. Understanding the balance between reward and risk is crucial, especially considering that many options may expire worthless. We calculate SM Energy Co.’s trailing twelve-month volatility at 54%, based on the last 250 trading day closing values and the current price of $22.95. For alternative call options and various expiration dates, visit the SM Stock Options page on StockOptionsChannel.com.

Market Overview: Put and Call Volume Analysis

In mid-afternoon trading on Tuesday, put volume among S&P 500 components reached 750,318 contracts, while call volume stood at 1.25 million contracts, resulting in a put:call ratio of 0.60. This indicates higher call volume compared to puts, suggesting that traders are favoring call options today compared to the long-term median put:call ratio of 0.65.

For more insights into which call and put options are gaining attention among traders today, find out.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.