Commit To Purchase Kosmos Energy At $5, Earn 11% Annualized Using Options

Investors eyeing a purchase of Kosmos Energy Ltd (Symbol: KOS) stock, but cautious about paying the going market price of $6.49/share, might benefit from considering selling puts among the alternative strategies at their disposal. One interesting put contract in particular, is the October put at the $5 strike, which has a bid at the time of this writing of 30 cents. Collecting that bid as the premium represents a 6% return against the $5 commitment, or a 11% annualized rate of return (at Stock Options Channel we call this the YieldBoost).

Selling a put does not give an investor access to KOS's upside potential the way owning shares would, because the put seller only ends up owning shares in the scenario where the contract is exercised. And the person on the other side of the contract would only benefit from exercising at the $5 strike if doing so produced a better outcome than selling at the going market price. (Do options carry counterparty risk? This and six other common options myths debunked). So unless Kosmos Energy Ltd sees its shares fall 23.1% and the contract is exercised (resulting in a cost basis of $4.70 per share before broker commissions, subtracting the 30 cents from $5), the only upside to the put seller is from collecting that premium for the 11% annualized rate of return.

Interestingly, that annualized 11% figure actually exceeds the 0.8% annualized dividend paid by Kosmos Energy Ltd by 10.2%, based on the current share price of $6.49. And yet, if an investor was to buy the stock at the going market price in order to collect the dividend, there is greater downside because the stock would have to fall 23.08% to reach the $5 strike price.

Always important when discussing dividends is the fact that, in general, dividend amounts are not always predictable and tend to follow the ups and downs of profitability at each company. In the case of Kosmos Energy Ltd , looking at the dividend history chart for KOS below can help in judging whether the most recent dividend is likely to continue, and in turn whether it is a reasonable expectation to expect a 0.8% annualized dividend yield.


Below is a chart showing the trailing twelve month trading history for Kosmos Energy Ltd , and highlighting in green where the $5 strike is located relative to that history:


The chart above, and the stock's historical volatility, can be a helpful guide in combination with fundamental analysis to judge whether selling the October put at the $5 strike for the 11% annualized rate of return represents good reward for the risks. We calculate the trailing twelve month volatility for Kosmos Energy Ltd (considering the last 252 trading day closing values as well as today's price of $6.49) to be 53%. For other put options contract ideas at the various different available expirations, visit the KOS Stock Options page of StockOptionsChannel.com.

In mid-afternoon trading on Tuesday, the put volume among S&P 500 components was 1.37M contracts, with call volume at 1.76M, for a put:call ratio of 0.78 so far for the day, which is unusually high compared to the long-term median put:call ratio of .65. In other words, there are lots more put buyers out there in options trading so far today than would normally be seen, as compared to call buyers. Find out which 15 call and put options traders are talking about today.

Top YieldBoost Puts of the S&P 500 »

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


More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.