This is a defensive in-the-money covered call recommendation on Apache Corporation setup as an income investment.
Covered Call Strategy:
Look at the January 85 covered call. For each 100 shares of Apache Corporation (APA) stock you buy, sell one January 85 covered call option for an 80.08 (94.63 – 14.55) debit or better. That’s potentially a 6.1% assigned return. This stock also pays a dividend which may add another 0.4% to the return. The stocks last ex-dividend date was 7/20/2011. S&P rates the stock as 5 stars (strong buy). The stock has to drop 15.4% to threaten the breakeven point.
S&P research notes:
S&P maintains strong buy recommendation on shares of Apache Corp (APA) . APA plans to acquire ExxonMobil’s (XOM) Beryl and other North Sea fields for $1.75B(expected Q4 close), lifting North Sea production and reserves 54% and 44%, respectively (65% liquids). North Sea success at Forties (doubled reserves since ’03) should aid to maximize Beryl opportunities. APA boosts exposure to higher-priced Brent crude and UK natural gas. North Sea will represent 11% of production (7% prior). We find APA’s balance sheet superior with debt-to-capital of 23%, cash of $1.1B, and capital flexibility vs. peers, and see valuation as compelling.