Investment Reflection: Coterra Energy (CTRA) Put Option Strategy
Initial Position: August 23, 2024
On August 23, 2024, I initiated an option strategy by selling 2 contracts of Coterra Energy (CTRA) $Coterra Energy Inc.(CTRA)$ put options with a strike price of $23 and a maturity date of October 18, 2024, collecting an option premium of $36 per contract. The decision to take a bullish stance on Coterra by selling puts was based on the following positive factors:
Coterra’s High Margins and Strong Cash Flow: Coterra Energy’s low debt levels, disciplined capital management, and quality long-life reserves gave me confidence in the company's ability to withstand market fluctuations, particularly in the natural gas sector.
Depressed Natural Gas Prices: At the time, natural gas prices were low, but the long-term outlook remained favorable. Coterra's operational efficiency and strategic assets in the Permian Basin and Marcellus Shale presented a compelling case for a rebound in stock value as the global energy market pivoted toward natural gas demand, especially driven by increasing LNG exports.
By selling the put options, I believed that Coterra would likely remain above the $23 strike price, allowing me to keep the premium as profit if the options expired worthless. This strategy gave me an immediate return from the collected premiums while expressing optimism for Coterra's stock performance.
Rollover: September 20, 2024
As market conditions evolved, I rolled over the original 2 CTRA put contracts on September 20, 2024, extending the maturity date to November 15, 2024, and collecting an additional premium of $38 per contract. The motivation for the rollover included:
JPMorgan's Revised Price Target: JPMorgan reduced Coterra’s price target from $31 to $26, primarily due to concerns about falling crude and natural gas prices, as well as potential oversupply from OPEC+. However, JPMorgan maintained its overweight rating, reflecting confidence in Coterra's longer-term fundamentals.
Coterra’s Solid Financials: Despite the cautious market environment, Coterra reported $1.27 billion in revenue and an EPS of $0.37, which, though slightly missing revenue expectations, confirmed stable production levels (647 MBoepd) and effective capital management.
Capital Management and Dividends: Coterra’s ongoing capital expenditures and steady dividend payouts ($0.21 per share) signaled a commitment to shareholder returns, which supported my belief that the stock would likely hold or recover near-term losses.
This rollover reflected a calculated move to further benefit from option premiums while adjusting the timeline to allow for potential market recovery. It also indicated a recognition of short-term risks but sustained confidence in the stock’s fundamental strength.
Outlook and Insights
From an investment strategy perspective, the decision to sell CTRA put options was rooted in a favorable long-term view of Coterra Energy, despite some near-term volatility. The premiums collected on both the initial and rolled options provided a buffer against potential downside and improved the overall return profile.
Key factors influencing this outlook include:
Stable Production and Positive Natural Gas Demand: Coterra's stable production levels and positive outlook for natural gas, especially driven by growing LNG exports, continue to provide a solid foundation for the stock's long-term performance.
Low Debt and Strong Cash Flow: These factors reinforce the company's ability to weather temporary fluctuations in energy prices, making the risk of a significant drop below the $23 strike price less likely.
Market Volatility and Analyst Caution: While JPMorgan’s revised price target reflected market caution due to external factors like OPEC+ supply concerns, Coterra's fundamentals and favorable analyst ratings (buy/overweight) still support a positive long-term outlook.
Conclusion
The strategy of selling put options on Coterra Energy has so far proven effective in generating income through option premiums, particularly in a market where the company’s long-term fundamentals remain strong despite short-term challenges. By rolling over the contracts, I extended the opportunity to benefit from improving natural gas market conditions and ongoing investor confidence in Coterra’s operational and financial performance.
Going forward, the key risks remain tied to broader energy market fluctuations, especially crude and natural gas prices. However, Coterra’s strategic position in key U.S. production basins, strong capital management, and favorable analyst sentiment suggest the stock will likely hold above the strike price, making the put options a valuable tool in this investment strategy.
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
