Editor’s Note: I’ll be taking the rest of the week off to attend a pickleball tournament (I know that sounds funny, but that’s really a thing), so I’m issuing this week’s Income Millionaire trade alert today. 

Instead of selling a put this week, we are going to write a call against our recently assigned position in Spectra Energy Partners (NYSE: SEP) as described further below.

Five months ago, we sold a put option on SEP with a strike price of $35 that expired on June 15. Unfortunately, in between those dates Enbridge (NYSE: ENB), SEP’s corporate sponsor, announced its intention to acquire all of its MLPs, including SEP.  That transaction as initially proposed would involve a stock swap that valued SEP at around $30.

That’s the bad news. We had no choice but to buy SEP last month at our strike price of $35 even though it was trading for about $5 less than that.

Now, the good news. Last week, the company that sponsors benchmark indexes for the energy sector, Alerian, announced the creation of two new MLP indexes, both of which include SEP. Combined with the price of oil surging above $74 last week, demand for energy companies is on the rise. Consequently, SEP opened this morning at $35.01, one penny above our cost basis.

If you don’t want to have money tied up in SEP, you can sell it now and essentially break even on this trade. But if you like its 8% yield and believe (as I do) that Enbridge will need to up the ante if it really wants to acquire SEP, then writing a covered call against this position is a good way to get a little more juice out of it.

Since this the first “covered call” option we are writing in this portfolio, I’ll go over a few of the basics so you can decide if this is something you’d like to do. When you sell a call option on a stock you presently own, you are exchanging its appreciation potential above the strike price in exchange for receiving option premium now. So, if you believe it is likely that SEP will be trading above $36.50 (option strike price plus minimum premium received as explained below) on September 21, 2018 (expiration date of premium), then you would not want to make this trade.

However, if you think it is unlikely that SEP will be trading above $36.50 ten weeks from now, then this trade makes sense.

How to Make the Trade:                   

• Trade: Sell to open the September 21, 2018, $35 Call on SEP.
• Allocation: Sell one call for every 100 shares you would be pleased to sell at $35 per share.
• Prices:
  • Current Stock Price: $35.25
  • Limit Order Price: a credit of $1.50 or more.
  • Tell your broker: “I want to sell a covered call on Spectra Energy Partners (NYSE: SEP) stock. Specifically, I want to ‘sell to open’ one September $35 Call for a credit of $1.50 per share or more.” [Ed.note: was erroneously stated as October in original alert]
• Further Instructions Regarding the Trade:
  • 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 $1.50 per share or more.
  • Place your limit order on a “good ’til canceled” (GTC) basis and be patient.

 The Win-Win Situation:

For every call contract you sell, you will collect at least $150 that’s yours to keep no matter what happens in the future.

If the call expires worthless, meaning the stock price is below $35 per share at expiration, then we’ll do another trade to create another instant payment.

If the stock is trading at or above the strike price upon the contract’s expiration, then you’ll be selling SEP at its current market price – plus the premium you pocketed when you sold the put.

Then, we’ll use those proceeds to find another stock to sell a put against and start the cycle all over again.