SandRidge Energy Inc. (SD), Chesapeake Energy Corporation (CHK): One Simple Investment Strategy You Simply Must Learn

The final company that’s on my list is natural gas producer Ultra Petroleum Corp. (NYSE:UPL). Unlike Chesapeake Energy Corporation (NYSE:CHK) and SandRidge Energy Inc. (NYSE:SD), Ultra Petroleum Corp. (NYSE:UPL) hasn’t bet big on switching from natural gas to liquids. Instead, as a low-cost producer its focus has been on drilling profitable natural gas wells. The company made the decision to cut back on its growth plans and instead is investing within its cash flow. That strategy could make Ultra a big winner if gas prices improve further.

I think that writing puts would be the best way to purchase this stock because shares could be volatile if natural gas prices move lower. The September $22 puts caught my eye as these can be written for around $140 per contract. That equates to around a 6% yield, which leads to a potential buy price of $20.60. That’s a pretty compelling price to purchase shares while a 6% yield over the next few months wouldn’t be a bad consolation prize.

As you can see, writing puts is a great investment strategy to learn. Other than the income, this is a strategy that takes advantage of volatility by removing some of its sting, because you really have many ways to win when you write puts. However, before you begin your journey writing puts, let me just remind you of the three key takeaways:

1). You must be willing to buy the stock at the strike price.
2). The payment received needs to be worth it.
3). You’re biggest risk could be missing the stock’s upside.

That final takeaway is one that you can’t neglect. If you’d be disappointed by missing a stock’s upside then a put is not worth the risk. Instead, look at writing puts as an investment strategy to either begin a new position on a stock trading higher than you want to pay or even to add to a position. For these reasons and more, writing puts is, in my opinion, the one investment strategy you simply must learn.

The article 1 Simple Investment Strategy You Simply Must Learn originally appeared on Fool.com and is written by Matt DiLallo.

Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Ultra Petroleum. The Motley Fool owns shares of Ultra Petroleum and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, Short Jan 2014 $15 Puts on Chesapeake Energy, Long Jan 2014 $30 Calls on Ultra Petroleum, Long Jan 2014 $40 Calls on Ultra Petroleum, and Long Jan 2014 $50 Calls on Ultra Petroleum.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.