Trade Alert: Options for Opteon
In our younger days, my wife and I owned a condo that had a 27-year old HVAC system. Replacing it would have entailed renting a large crane to remove the old unit and put the new one on our roof.
As you can imagine, that made the cost of upgrading prohibitively expensive. Whenever the old unit would falter, the guys who came by to service it would shrug and tell us we were better off pumping new refrigerant into it than buying a new system.
We kicked the can down the road indefinitely when we finally sold the condo and gave the new owner a warranty in case the system finally died.
But the days of getting away with pumping refrigerant into ancient systems are pretty much coming to an end. U.S. government regulations have helped make The Chemours Company’s (NYSE: CC) environmentally friendly refrigerant Opteon the new standard, giving the company a sizable earnings tailwind over the next few years.
Chemours is also a major producer of titanium dioxide, which is primarily used as a pigment in all manner of products from paint to toothpaste. Prices for the chemical are currently rising as higher demand creates a tight global market for the product.
While Chemours’ earnings and free-cash-flow growth story are rosy, there are still aspects of the company’s operations that we need to monitor.
For one, as a chemicals company, Chemours has been involved in litigation due to contamination of local water supplies near its factories. That can create headline risk, most recently over the past year in North Carolina.
Typically, however, such litigation takes years, sometimes even decades, before there’s a settlement. So it should not pose a near-term risk to the company’s financials.
Additionally, in February the CEO made noise about doing a major acquisition this year. After taking some heat from the market, he dialed his ambitions back and said he would instead be looking to do smaller, bolt-on transactions in the hundreds of millions of dollars, as opposed to billions.
Aside from those two factors, the timing of this trade avoids overlapping with the company’s next earnings release, which isn’t expected until early August. While Chemours has delivered an impressive string of earnings beats, I’d prefer to avoid any earnings-related surprises.
This trade will generate immediate income of $70 per contract now, with the possibility of buying Chemours at an 11.2% discount to where it currently trades if the stock gets put to you. Investors should set aside $4,500 per contract sold to buy the stock in case the option expires in the money.
Regardless of how many contracts you sell, it’s absolutely critical that you follow the instructions below, particularly when it comes to setting the limit order.
How to Make the Trade:
- Trade: Sell to open the July 20, 2018, $45 Put on CC.
- Allocation: Sell one put for every 100 shares you would be pleased to buy at $45 per share.
- Current Stock Price: $50.59
- Limit Order Price: a credit of $0.70 or more.
- Tell your broker: “I want to sell a put on Chemours (NYSE: CC) stock. Specifically, I want to ‘sell to open’ one July $45 Put for a credit of $0.70 per share or more.”
- Further Instructions Regarding the Trade:
- If the option price changes, you can adjust our recommended limit based on the midpoint of the bid/ask spread, which you should be able to see when entering the trade. Just make sure the potential credit is at least $0.70 per share or more.
- Place your limit order on a “good ‘til canceled” (GTC) basis and be patient.
The Win-Win Situation:
For every put contract you sell, you will collect $70 that’s yours to keep no matter what happens in the future.
If the put expires worthless, meaning the stock price is above $45 per share at expiration, then we’ll do another trade to create another instant payment.
If the stock is trading at or below the strike price upon the contract’s expiration, then you’ll be buying Chemours at an 11.2% discount to the current market price, while locking in a yield of 1.5%—plus the premium you pocketed when you sold the put.
Then we’ll collect the dividend while creating more instant payments by selling covered calls against the stock.