Ultra Petroleum Corp. (NYSE: UPL) is an independent oil and gas company. It is actively engaged in the acquisition, exploration, development and production of oil and natural gas in the United States.

The energy sector has underperformed the broader market in the past year, with the Energy Select Sector SPDR (NYSE: XLE) up less than 14% compared with the S&P 500’s 22% gain.

Yet, as you can see in the chart below, UPL has drastically outperformed its sector (and the overall market), gaining 53% in the past 52 weeks. This is in stark comparison to some of its biggest peers like Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), which are up 8% and less than 1%, respectively, during that time.

#-ad_banner-#On Feb. 20, UPL rallied 4% after reporting better-than-expected fourth-quarter and full-year 2013 results. Q4 earnings of $0.42 per share bested Zacks consensus estimate of $0.37, and this was attributed to a 78% year-over-year decline in operating costs for the quarter and an increase in price realizations.

The company saw 58% adjusted operating cash flow margin and a 29% adjusted net income margin.

CEO Michael D. Watford commented on the results, saying: “For our company, 2013 was a transitional year, as we experienced the bottoming of the natural gas commodity cycle and the correct response of reduced capital investments over the past two years. With that behind us, we are poised to return to profitable growth and expanding margins. As we look ahead to 2014, we are anticipating 40 percent EBITDA and cash flow growth. A significant driver of this growth will be a tripling of our oil production through development of our Uinta Basin oil asset.”

UPL sports a price-to-earnings (P/E) ratio of 11, well below the sector average of 19, and earnings are expected to grow more than 37% this year and 30% next year, well ahead of its peers.

I am excited about the upside potential for UPL, but the company does not pay a dividend. But we can create our own “dividend” with a covered call strategy.

A call option gives the buyer the right but not the obligation to buy shares of the underlying stock at an agreed upon price (the option’s strike price) within a certain period of time.

The seller of a call option (also known as the writer) sells the right to the buyer for a payment known as a premium. In doing so, the seller assumes the obligation to deliver the shares at the agreed upon price should the buyer choose to exercise her or his right.

With UPL trading at about $25 per share at the time of this writing, we can buy 100 shares and simultaneously sell an April call option with a $25 strike price, which is currently trading for about $1.30 ($130 per contract) and expires on April 17. (These calls expire on the Thursday prior to the third Friday of April due to the market being closed for the Good Friday holiday.)

Since we receive $1.30 for selling the call, our net cost is lowered to $23.70 per share. Prices may be slightly different depending on when you read this, but I like this trade at a net cost of $23.80 or less.

Here’s how this covered call trade could work out:

If the shares trade above the $25 strike price, the options buyer will purchase the shares from us at $25, giving us a gain of at least $1.20 per share, or 5% in 43 days. This works out to a 43% per-year rate of return.

If UPL trades lower, we would not experience a loss unless it falls below our net cost of $23.80 or lower, giving us a cushion of about 5% at current levels.

If UPL is below $25 at expiration, then the call option will expire worthless. We then have the ability to sell another call option against the shares to generate more income and lower our cost basis further, while still collecting dividends.

If you were able to generate $1.30 in income every 44 days on this stock, that would add up to $10.78 a year, giving you a “yield” of 43.1% at current prices. Not bad for a stock that doesn’t even pay an actual dividend!

This article originally appeared on ProfitableTrading.com:
Create Your Own 40%-Plus Yield on This Non-Dividend Paying Stock

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