Trade Alert: From the Wellhead to the Market
What’s in it for you?
Enterprise Products Partners LP (NYSE: EPD) is not only the largest master limited partnership (MLP), it’s also one of the most financially conservative. Unlike many of its peers, EPD typically retains a significant portion of cash flow to reinvest in future growth.
Now, it’s going even further by retaining even more cash flow, so that it can move toward fully self-funding the equity portion of its capital program by next year. While distribution growth is slowing, these moves further support a strong balance sheet and an already ample distribution coverage ratio.
This trade will generate immediate income of $40 per contract now, with the possibility of buying this high-yield MLP at a 10.7% discount to where it currently trades if the stock gets put to you. Investors should set aside $2,300 per contract sold to buy the stock in case the option expires in the money.
How to Make the Trade:
- Trade: Sell to open the June 15, 2018, $23 Put on EPD.
- Allocation: Sell one put for every 100 shares you would be pleased to buy at $23 per share.
- Current Stock Price: $25.76
- Sell to open the June 15, 2018, $23 Put (bid/ask): $0.35/$0.45
- Set a limit order based on the midpoint of the bid/ask spread: a credit of $0.40.
- Tell your broker: “I want to sell a put on Enterprise Products Partners LP (NYSE: EPD) stock. Specifically, I want to ‘sell to open’ one June $23 Put for a credit of $0.40 per share or more.”
- If the option price changes, you can adjust our recommended limit based on the midpoint of the bid/ask spread, which you should be able to see when entering the trade. Just make sure the potential credit is at least $0.40 per share or more.
The Win-Win Situation:
For every put contract you sell, you will collect $40 that’s yours to keep no matter what happens in the future.
If the put expires worthless, meaning the stock price is above $23 per share at expiration, then we’ll do another trade to create another instant payment.
If the stock is trading at or below the strike price upon the contract’s expiration, then you’ll be buying this high-yield MLP at a 10.7% discount to the current market price, while locking in a yield of 7.4%—plus the premium you pocketed when you sold the put.