Income is key to Penn West strategy

optionMONSTER

One investor is using options to turn Penn West Petroleum into a cash cow.

optionMONSTER's tracking programs detected the purchase of 2,300 July 10 calls for $0.65 and the sale of an equal number of July 12 calls for $0.05. Volume was below open interest in the July 10s, which suggests that an existing short position was closed and rolled to the higher strike.

The trader probably owns shares in the Canadian energy company and is selling the options as part of a covered call strategy. This way, the investor collects income in return for agreeing to limit profits in the event of a rally. (See our Education section)

PWE is off 0.2 percent to $10.04 in morning trading. Another benefit of selling calls is that it lets the investor earn more cash on top of the company's hefty 10 percent dividend yield. Rolling the position higher today raised by $2 the level at which shares must be sold. It cost just $0.60 to raise that eventual exit price.

Alternatively, if both halves of the trade were opened, this is a vertical spread --another bullish strategy.

Total option volume is twice the daily average so far today, with calls outnumbering puts by 3 to 1.

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