One of the major questions on investors’ minds — besides when the Federal Reserve will stop kicking the can down the road and who the next occupant of the White House will be — is whether oil has reached a bottom. 

While we can’t be sure yet, it’s possible oil bottomed earlier this year and is now in a trading range with a lower boundary near $40 a barrel.

But whether oil has bottomed is really more of an important question for futures traders who buy and sell the commodity. For stock market investors, a better question to ask is whether an energy stock’s current price reflects oil’s decline or whether a company has adapted to lower oil prices.

One name that gets a resounding “yes” to both of these questions is Tesoro (NYSE: TSO).

The stock fell more than 40% from its November peak to its February lows — a sizeable enough drop that we can reasonably say it reflects the reality of lower oil prices — and has since regained roughly a quarter of those losses. 

#-ad_banner-#​Tesoro also seems to have adapted to the lower-price environment remarkably well. Thankfully, as a refining and marketing company, it has less exposure to the price of oil than an exploration company.

The oil refiner operates six refineries in the western United States with a combined capacity of approximately 900,000 barrels per day. These refineries are an important asset that few energy companies have. Since the early 1980s, the number of refineries in the United States has dropped from around 300 to only 140 today.

The company also owns and operates a network of approximately 3,500 miles of pipelines, as well as a handful of natural gas processing complexes, and its retail operations include almost 2,400 gas stations.

Tesoro’s integrated business means it makes money at nearly every step of the process. Other companies pay TSO to transport oil and natural gas from the oil fields to the refineries through its extensive pipeline system. TSO then refines the oil into crude byproducts like gasoline, which it sells to consumers at its gas stations.

While TSO could be more profitable with higher oil prices, the company is expected to report earnings per share (EPS) of $5.50 this year and $6.05 next year. The stock is priced at about 15 times this year’s expected earnings. Over the past five years, companies in the oil and gas operations industry have traded with an average price-to-earnings (P/E) ratio of 16.8. So, Tesoro could trade another 11% higher before it is in line with its historical peer average.

TSO pays an annual dividend of $2.20 per share for a respectable yield of 2.6%. Traders can certainly buy shares here to benefit from a potential turnaround in oil prices and collect dividends while they wait.

However, I’d like to present you with an alternative income strategy: selling put options. And before you shy away at the mention of options, let me explain how easy this strategy is.

Put options give buyers the right — but not the obligation — to sell a stock at a specified price (the strike price) before a specified date (the expiration date). Put sellers, on the other hand, receive cash up front (known as premium) for agreeing to buy shares if they are below the option’s strike price at expiration.

Typically, selling a put means we’re expecting the stock not to fall to the strike price. If it does, for every contract we sell, we have to buy 100 shares at that price. This isn’t a bad thing if the stock is one you want to own anyway, though, like TSO. It simply means you pick up shares at a discount.

When you sell a put, your broker will likely require you to deposit a percentage of that obligation (i.e., the cost of purchasing 100 shares at the strike price) in your account, like a down payment on a house. This is called a “margin requirement” and it usually runs about 20% of the amount it would cost you to buy the shares.

But if the stock goes up, or doesn’t sink to the price we specified, we pocket the income we received as pure profit without ever having to purchase shares.

I’ve successfully sold puts on TSO seven times since March 2013 with an average annualized return on margin of 48.7%.

In the interest of full disclosure, I’ve also made one unsuccessful trade on TSO with an annualized loss of 52.5%.

But the vast majority of my trades have been winners. Since 2013, I’ve recommended 140 trades to my Income Trader subscribers, and 134 of those have been winners. That’s a 96% win rate.

I’ve prepared an eight-minute training video that explains exactly how this strategy can work in your account. I’ve been told that it’s the clearest explanation of selling puts that you’ll ever see. 

I’ll also show you my full track record and tell you how you can get my latest put selling recommendation on TSO. Click here.