The Plan for Buckeye

Editor’s Note: This is follow-up advice for an earlier trade. If you did not sell to open the May 18, 2018, $40 Put on BPL, then you can ignore this alert.

Under this service’s strategy, stock assignment isn’t necessarily a bad thing. That’s because unlike other options services, we’re comfortable taking ownership of a stock and then selling covered calls against it until the stock gets called away.

Even so, Buckeye Partners LP’s (NYSE: BPL) first-quarter performance and forward guidance were weaker than I had expected.

Consequently, I’ve been considering a few possibilities for this trade.

The first is buying back the put for a debit that’s equal to or less than our initial credit. I had been hoping for a chance to do better than that, but the market has not cooperated this week.

Still, as I write this, Buckeye trades just 0.9% below the strike price. So there’s a chance that if the stock can rise closer to its strike price between now and the market’s close tomorrow, then we may be able to execute a closing transaction under those terms. Accordingly, I’ve included instructions for such a transaction below.

I also considered rolling the put down and out–to a lower strike and a later expiration. However, the economics of that trade, which would entail buying back the put we sold and then selling the August $35 Put, are not all that attractive.

And the timing of the expiration for such a trade would put us in the same situation we experienced here, with earnings, the next ex-dividend date, and the August expiration all happening within a two-week period.

So I’ve decided to take a hybrid approach to this trade: One that includes the possibility of a closing transaction, but with accepting the likelihood of assignment and a potentially short-term holding period for the stock.

If shares of Buckeye are automatically assigned to you after tomorrow’s close, set an upside sell limit at $40.

If that parameter does not get triggered within a week or two, we’ll sell a June $40 Call against the stock, so that we can generate more income while waiting to see if the stock gets called away by June 15.

I will issue an Alert with those subsequent instructions, if the $40 sell limit order on the stock does not get filled within the aforementioned timeframe.

For now, please follow the instructions below to see if we can close the trade by buying back the put.

How to Make the Trade:

  • Trade: Buy to close the May 18, 2018, $40 Put on BPL.
  • Allocation: Buy back all contracts sold for the May 18, 2018, $40 Put on BPL.
  • Prices:
    • Current Stock Price: $39.64.
    • Limit Order Price: Set it at your initial credit–our official credit is $0.43, but yours may be different.
    • Tell your broker: “I’d like to buy to close the Buckeye Partners May $40 Put for a limit debit price of [the amount of your initial credit] per share or less.”
  • Further Instructions Regarding the Trade:
    • If the option price changes to one that’s more favorable to your particular situation, you can adjust your limit based on the midpoint of the bid/ask spread, which you should be able to see when entering the trade. But try to keep the potential debit no higher than the amount of your initial credit. The limit should be “good ’til canceled” through tomorrow’s close.

Stock Talk

Ajax

Ajax

Ari,

How safe do you feel the BPL dividend is?

Thanks,
AJS

Ari Charney

Ari Charney

Hi Ajax,

The situation is tight because they’re expecting to temporarily under-earn their distribution this year before returning to full coverage. But I think they’ve bought themselves time to get it together.

A lot depends on whether credit raters apply pressure. Right now, all three of the main agencies have stable outlooks on their ratings. And Buckeye’s leverage ratios actually improved over the past three quarters, thanks in part due to partial equity credit for the junior subordinated notes issuance and the February equity issuance.

Beyond that, it sounds like management has a regular dialogue with the main agencies. In reviewing past credit opinions, it looks like credit raters are willing to grant temporary leeway as long as the company has a credible medium-term plan to lower leverage and return to full distribution coverage.

Nevertheless, I think this one should be kept on a short leash.

Ari

Ajax

Ajax

I think if I acquire the BPL shares when the option expires, I’ll hold those shares. They will add to the position I already have. Then, as you say, I will attempt to watch it closely. I suppose it is in the Personal Finance portfolio and that would recommend when to sell if that becomes necessary. For all I know that person will be you!

Thank you for the prompt and thorough response.

Ray Wojciechowski

Ray Wojciechowski

Hi Ari. Just wanted to confirm. This trade is also a put? I’m new to this.

Ari Charney

Ari Charney

Hi Ray,

This trade involves a put. However, if you didn’t previously sell this put, please ignore this alert.

Ari

Jeffrey Y

Jeffrey

Hi Ari,
I have closed my position with little profit left. Thanks.

On 27-Feb, SOLD BPL May18’18 40 PUT @ 0.7

On 17-May, BOUGHT BPL May18’18 40 PUT @ 0.55

Ari Charney

Ari Charney

Hi Jeffrey,

Thanks for the update–glad to hear you were able to close the trade with at least a little bit of profit.

Ari

Ray Wojciechowski

Ray Wojciechowski

Hi! Ari. What is the usual time frame if the BPL option was either assigned to me or expired ? I didn’t see any assignment yet ?
Thanks! Ray

Ari Charney

Ari Charney

Hi Ray,

In most cases, you should expect to see a notification regarding assignment before the market opens on Monday.

Ari

ETKTRIDE

ETKTRIDE

Hi Ari, was finally able to BTC the BPL at $1.40 on Friday, booking an $80 loss – this was my 1st trade with IM so hopefully I will have better luck on my next trades.
Still keeping the faith – Michael

Ari Charney

Ari Charney

Hi Michael,

I’m sorry to hear that. This one ended up being a far more wild ride than I ever could have anticipated. I think we would have probably been fine if we were dealing with company weakness alone, but the FERC rule change was a knockout blow for most of the sector, even those with minimal exposure to it.

Ari

Ray Wojciechowski

Ray Wojciechowski

Hi! Jim. With BPL gaining, do you have any possible trades in the near future? BPL was assigned to me in May. Thanks! Ray

Jim Pearce

Jim Pearce

Hi Ray. We are close to being able to write a profitable covered call on BPL at our $40 cost basis, so I am contemplating doing so perhaps as soon as this week. However, I also really like its 13% yield, so I may issue an update instead of a trade alert if I decide to keep it in the portfolio. Either way, I will let everyone know when that happens.

Jim Pearce

Jim Pearce

Hi Ray. BPL covered call trade coming your way in a few minutes.

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