We inherited a position in The Williams Companies (WMB) from one of our predecessor services at a cost basis of a little over $30. Williams is a diversified energy company whose share price tends to rise and fall with the price of oil.

Four months ago, while oil prices were still high, I recommended selling a covered call on WMB at a strike price of $29 for a premium of at least $1.50. That day, WMB was trading near $28. If that option got exercised against us then we would have recouped our original cost basis plus a small profit.

Since then, WMB’s share price has fallen along with oil prices (see chart above). For that reason, the covered call option we wrote back in September expired worthless last week. That means we get to keep the stock, albeit at a current share price closer to $26.

Thanks to the covered call premium we received four months ago, our cost basis in WMB was immediately reduced to $28.90 [=$30.40-1.50]. Since then, we also received a quarterly dividend payment of 34 cents, further reducing our cost basis to $28.56.

So, we are going to write another covered call on WMB that expires on August 16 at a strike price of $28 for $1. If it ends up being exercised against us, then the net proceeds from that trade of $29 will exceed our adjusted cost basis of $28.56.

In addition, we will receive any dividends paid so long as we continue to own WMB. The next dividend payment should occur in late March or early April, and there should be one more in the June/July timeframe. If both of those payments are the same as the last one then that would add another 68 cents to our profit.

Under that scenario, there would be a net profit of $1.12 on our original cost basis of $30.40, which works out to a return of 3.7% in eleven months. That’s not great, but not bad either considering this is an example of a stock that never returned to its original cost basis during that entire span.

Even if you do not own shares of WMB, it is helpful to understand the math behind this series of transactions. You can employ a similar strategy with the three short put positions that were assigned to us last week in the months to come to recoup your investment in them.

How to Make the Trade:

• Trade: Sell to open the August 16, 2019, $28 Call option on WMB.
• Symbol: WMB190816C00028000
• Allocation: Sell one call for every 100 shares of WMB you would be pleased to sell at $28 per share.
• Prices:
  • Limit Order Price: a credit of $1.00 per share or more.
  • Tell your broker: “I want to sell a covered call on The Williams Companies (NYSE: WMB) stock. Specifically, I want to ‘sell to open’ one August 2019 $28 Call for a credit of $1.00 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 $1.00 per share or more.
  • Place your limit order on a “good ’til canceled” (GTC) basis and be patient.