Dykstra: Precision Drilling Options Warm Up

Today's deep-in-the-money call pick, Precision Drilling Trust(PDS Quote), is an excellent value. Precision Drilling performs contract drilling services in Canada, primarily in natural gas but also in oil. At Wednesday's close of $26.43, the stock is trading 30% below its 52-week high, but now is a good time for a DITM play.

The company suffered a slow first quarter, and its monthly distribution has dropped twice thus far this year. In January, the company, which as a trust makes a monthly payment to investors, paid 19 cents per share, 39% below the December distribution. Though the reduced distribution hurt the stock in January, the negative sentiment has had enough time to cool off. In addition, the dividend cut allowed the company to decrease its already small debt and presents the possibility of some strategic acquisitions.

The company's dividend is still attractive and should appeal to value investors, and the balance sheet remains impressive.

At the stock's recent close of $26.43, I can buy the December 22.50 calls (PDSLX) for a premium of less than 60 cents. So I have placed a limit order for 10 contracts at $4.50, which will allow me to control 1,000 shares of Precision Drilling ($26,430 in common stock value) for $4,500 until December. This will allow more than enough time for Precision Drilling to recover from a seasonally slow time of year. ...