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.
- 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.