With options premiums still elevated due to the military conflict in the Gulf, selling puts on an energy major posting record free cash flow offers a rare combination: high probability, real yield, and a worst-case scenario you can live with.
Chevron trades for less than 14 times forward price-to-earnings, generated ~$18 billion-plus in free cash flow in the most recently reported quarter, and ~14% annualized return on a trade with a high probability of profit.
Chevron’s closing stock price today is roughly where it was trading in late 2022/early 2023, despite the company’s better operating results and arguably better outlook. The thesis doesn’t require prices to remain this high, and we certainly hope they don’t. However, based on current indicators, both oil prices and crack spreads are likely to stay elevated, resulting in record free cash flow, a forward multiple below 14 times earnings. The company reported that the $1.5 billion in run-rate synergies from the Hess acquisition are being realized faster than management guided.
Chevron, 5 years
The biggest knock on the story, one I appreciate well as a resident of the state, is outsized exposure to California’s burdensome regulatory environment. The company announced that they are moving their corporate headquarters to Houston from San Ramon, California. They have also announced that they could follow other companies’ lead and close refineries based in Richmond and El Segundo, but at this valuation, I believe one is appropriately compensated for the risk. Moreover, the risk the state faces is arguably larger than that faced by the company. This fact may aid Chevron in finding some compromise if local politicians recognize the risk to residents should refining capacity for the state’s required proprietary blends fall further.
Rather than buying the stock outright, I’d look to harvest the elevated options premiums. Implied volatility in CVX options has been elevated for months — premiums over the past six months are running meaningfully richer than they were in the back half of 2025 due largely to the uncertainty the military conflict in the Gulf and the disruptions in shipping traffic transiting the Strait of Hormuz have created.
The Trade: Cash-Secured Put
- Sell the October $180 put for $4.75 (roughly 2.6% of the strike price)
- If CVX stays above $180 through expiration, keep the premium ~14% annualized rate of return
- Probability of profit above 72%
- Max profit $475 per contract
If assigned, the effective cost basis is $175.25, about 7.5% below the current price, or 13x forward earnings. Not a bad multiple for a company generating this much free cash flow. Either way, you can profit on this trade if the stock goes up, stays flat, or even decline a little, or specifically, less than the collected premium. In, a win, win strategy.
