ConocoPhillips has a 3.42% annual return, but short-term investors can earn 1.5% monthly

ConocoPhillips (POLICE) the action has a 3.42% dividend yield, well below its five-year average. As a result, their price target is at least 29% higher in $126.65 based on this performance. However, investors can sell short out-of-the-money (OTM) puts and earn around 1.5% monthly.

COP closed at $98.19 on Friday, January 16. It closed as low as $90.16 in the last month (December 16) and generally traded in a range between $90 and $100 for the last 2 months.

However, since November 6, 2025, when ConocoPhillips increased its quarterly dividend by 7.69% to 84 cents from 78 cents (i.e. $3.36 annual dividend per share or DPS), COP stock has been slowly rising.

This is likely because its annual dividend yield is still much higher than its historical average. That implies COP stock has a higher price target.

I discussed this point and the idea of ​​shorting OTM options in my December 19, 2025 Barchart article (“ConocoPhillips Stock Still Looks 18% Undervalued – How to Play COP Stock?“) and a previous Barchart article from November 21, 2025.

For example, Yahoo! Finance reports that COP has had an average dividend yield of 2.53% for the last 5 years. This is well below the current performance of 3.42% (i.e. $3.36 DPS/$98.19).

Additionally, Morningstar says COP has had a 5-year historical average of 2.29%. However, Seeking Alpha says the average has been 3.14%.

So, on average, these surveys show that the five-year average return has been 2.653%.

Therefore, if we assume that over time COP stock will rise and fall from its 3.42% yield to 2.653%, here is the target price (PT):

$3.36 DPS / 0.02653 = $126.65 P.T.

That’s 29% higher than the current price:

$126.53 PT / $98.19 today = 1.291 -1 = +29.1% the other way around

In other words, there is still good upside potential in COP stock even if oil and gas prices hold steady or fall. This means that the market believes that its average return should be 2.653%.

But, to be conservative, let’s assume the yield is close to 3.0%:

$3.36 DPS / 0.03 = $112.00 P.T.

This is still 14% higher than the current price. The bottom line is that COP stock could be undervalued.

One way to do this, to earn additional income and establish a lower potential buy point, is to sell out-of-the-money (OTM) collateralized short puts on monthly expiration periods.

In my last Barchart article on December 19, I suggested entering an order to “Sell to Open” a put contract expiring on January 23, 2026, at the strike price of $88.00. That strike price was 5% lower than the trading price at the time ($92.44).

At that time, the premium received was $1.13 per put contract, providing an immediate return of 1.284% (i.e. $1.13/$88.00). As of January 16, this put premium has fallen to $0.12 at the midpoint and is likely to expire worthless. So, this has been a successful exchange.

Investors can earn similar income in the future. For example, the expiration period of February 20, 2026 shows that the $92.50 strike price put contract has a midpoint premium of $1.63. This strike is 5.79% lower than Friday’s close.

Therefore, a trader who is short the $92.50 put contract expiring on February 20 earns an immediate return of 1.762% (i.e. $1.63/$92.50).

But, just to be conservative, look at the $90 strike price expiring on February 20th. It has a midpoint premium of $1.05. That gives a short seller of this put option a 1-month return. 1.167% (i.e. $1.05/$90.00).

The point is that a conservative investor (who shorts both contracts) can earn a relatively safe average return of almost 1.50% over the next month:

1.167% ($90 short put play) + 1.762% = 1.4645%

Since both contracts have relatively low delta ratios (i.e. between -0.18 and -0.26), there is only about a 22% chance that COP will fall to between $90 and $92.50.

However, the risk is that the COP falls below $90.00 on or before February 20. That could potentially result in an unrealized capital loss. But at least the investor has received income that reduces the break-even point.

The bottom line is that COP still seems undervalued. One way to play this is to sell short out-of-the-money (OTM) puts on 1-month expiry periods.

On the date of publication, Mark R. Hake, CFA had no (directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. This article was originally published on Barchart.com