The first half of 2022 came to a close last week, and the numbers weren’t pretty; the S&P 500 fell 20%, the Dow was lower by 15% and the Nasdaq declined by 30%. How the second half of the year will play out is anyone’s guess. However, until stocks show any real signs of sustained momentum, I will continue to keep the portfolio diversified, and will lean defensive with our options selling strategy

Cabot Profit Booster Issue: July 6, 2022

Market Overview
The first half of 2022 came to a close last week, and the numbers weren’t pretty; the S&P 500 fell 20%, the Dow was lower by 15% and the Nasdaq declined by 30%.

How the second half of the year will play out is anyone’s guess. However, until stocks show any real signs of sustained momentum, I will continue to keep the portfolio diversified, and will lean defensive with our options selling strategy.

The Stock – Alliance Resource Partners (ARLP)
Why the Strength
One by one, commodity sectors have been taking it on the chin, with copper, steel and other metals getting hit first, then shipping and, more recently, energy stocks joining in on the downside. And yet to this point, some coal stocks have been relatively firm—sure, maybe they’re next to fall, but the longer they can hold up, the greater the chance they can have another run down the road.

Alliance Resource Partners is the second largest coal producer in the eastern U.S., with seven underground mining complexes in Appalachia and Illinois; they also has a decent royalty business, with nearly 57,000 acres of oil and gas (86% is in the Permian and Anadarko basins) assets.

Alliance isn’t a standstill operation, with plans to invest in many newer energy areas (battery metals, EV charging infrastructure, solar power grids, etc.), but there’s no question it’s the firm’s current assets that are keeping buyers interested: Despite rail congestions, coal EBITDA lifted 46% in the first quarter (and made up 84% of cash flow) while oil and gas royalties more than doubled.

But more importantly it looks like future results could be even better despite all the economic headwinds—first, the aforementioned rail issues are clearing up, which should boost volumes; second, 94% of coal volumes are committed for the full year, so there’s not a ton of downside even if prices temporarily slip; and given how tight supplies are (partly due to the Russian invasion), management thinks 2023 could see even higher prices and margins.

All of that is leading to much higher dividends (7.5% current dividend with solid increases likely for the rest of this year; next ex-dividend date is early August) and plenty of cash to expand its investments in other areas as mentioned above. Analysts see earnings booming this year and up another 16% next. As a heads up, Alliance does produce a K-1 at tax time.

Technical Analysis
ARLP isn’t in the early stages of its advance, having trended higher for over a year, and it did take a hit three weeks ago when most energy/commodity names experienced selling. But the overall resilience is impressive, with shares down “only” 16% from all-time highs and with the stock well above its lows from two weeks ago. It’s low-priced and volatile. Stop — 15.3

The Covered Call Trade
Buy Alliance Resource Partners (ARLP) Stock at 18.50, Sell to Open August 17.5 Strike Calls (exp. 8/19) for $1.65, or a Net Price of 16.85 or less

Static Return: $65 per covered call (3.85%)

Breakeven: 16.85

Covered Call Return (if assigned): $65 per covered call (3.85%)

** Please note, I would expect we will receive the projected $0.35 dividend in August, but it is not guaranteed. Because of that uncertainty, I did not include the dividend in the profit scenarios above.

Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.

However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 16.85 or less. (In this case 18.50 minus 1.65 = 16.85. Or another example is you could pay 18.20 for the stock and sell the call for 1.35, which also equals 16.85)

For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …

Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.

The next Cabot Profit Booster issue will be published on July 12, 2022.

Analyst Bio

Jacob Mintz

Jacob Mintz is a professional options trader and editor of Cabot Options Trader. Using his proprietary options scans, Jacob creates and manages positions in equities based on unusual option activity and risk/reward.

Jacob developed his proprietary system during his years as an options market maker on the floor of the Chicago Board of Options Exchange, where he ran several trading crowds for nearly 10 years.

After a successful career on the trading floor Jacob was tasked with setting up a trading desk at a top-tier options trading company, trading against the most sophisticated hedge funds and institutions in the world.

Today Jacob trades for himself, coaches and teaches about options trading, and runs our Cabot Options Trader, Cabot Options Trader Pro and Cabot Profit Booster advisories. Jacob lives in North Carolina with his wife and two kids who keep him very busy with their sports and social calendars.