In this report, we share a high-income-generating options trade on a diversified pipeline company that continues to make progress on paying down debt, it continues to pay an attractive distribution, and the share price is increasingly attractive. We believe the trade is attractive to place today, and potentially over the next few trading sessions as long as the underlying share price doesn’t move too far before then.
Energy Transfer (ET).
Energy Transfer LP (ET) owns and operates a diversified portfolio of midstream energy assets. ET’s operations include crude oil, natural gas and natural gas liquids (NGL) pipeline services and storage, and natural gas midstream gathering and processing activities. We wrote in great detail about this company in our previous report, and you can access that report here.
Since that report, the company announced earnings whereby it continued to make progress on paying down debt and the share price has also fallen further (thereby bringing us to an even more attractive entry point). The share are compelling for a straight up purchase at these levels (especially considering the 6.4% distribution yield), but for those of you that are real sticklers on price—the high-income-generating trade in this report may be very attractive.
The Trade:
Sell Put Options on ET with a strike price of $9 (~5.1% out of the money, it currently trades at ~$9.48), and an expiration date of September 17, 2021, and for a premium of at least $0.13 (or $13 because options contracts trade in lots of 100). This comes out to approximately 1.44% of extra income in less than one month (22 days)—which may not sound like a big return—but it is significant for such a short time frame (it’s more than 17.3% of extra income on an annualized basis, roughly calculated as ($0.13/$9) x 12 months). And this trade not only generates attractive upfront premium income for us now, but it gives us a chance at buying shares of this attractive pipeline company at a significantly lower price ($9—the strike price) if the market price falls below $9 and the shares get put to us before this option contract expires in 22 days. And we get to keep the upfront premium income no matter what.
Also important to note, you can adjust the strike price of this trade (for example to $8.50) depending on how badly (and at what price) you want the shares put to you, and to generate a different amount upfront income as shown in the table above).
Your Opportunity:
We believe this is an attractive trade to place today, and potentially over the next few trading sessions, as long as the price of ET doesn't move too dramatically before then and you’re able to generate enough premium income to your liking.
Our Thesis:
Our thesis is basically that ET is an attractive, high-distribution, midstream play, trading at an attractive price. However, due to volatility and uncertainty in the market, the premium income available on this options trades is particularly attractive, especially if you are a stickler on entry prices for your positions (i.e. ET already trades at an attractive price, but you could get it at an even lower price if these shares get put to you). And even if the shares don’t get put to you before this options contract expires in 22 days, you still get to keep the attractive upfront premium income you generated, no matter what.
Important Trade Considerations:
Two important considerations when selling put options are ex-dividend (distribution) dates and earnings announcements because they can both impact your trade. However, neither is a factor for ET because it already went ex-dividend (distribution) this month (and it will not go ex-dividend (distribution) again until well after this trade expires). Similarly, ET already announced earnings earlier this month (earnings can be a big factor on share price), and it will not announce earnings again until well after this options contract expires. Had either of these events been scheduled to happen before this option contract expires then we’d have to receive a higher level of upfront premium income to adjust for those risks.
Conclusion:
Energy Transfer is an attractive pipeline company that offers an attractive distribution (current yield is 6.4%), and it is trading at an attractive price. The company continues to pay down debt, and will likely be able to increase the distribution payout again soon. If you are an income-focused investor, ET is attractive for a straight purchase.
However, if you’d prefer to pick up shares (units) of this company at an even lower price, then the options trade described in this report gives you a shot at doing that—plus it pays you high upfront premium income that you get to keep whether or not the shares get put to you.
Lastly, don’t forget, market prices are moving constantly, and you’ll likely have to “work this trade” a little if you enter it (i.e. you likely won’t get the exact same premium as described in this report). However, if you are an income-focused investor, we believe this is an attractive trade to place today and potentially into early next week.