A final aside is that even if I did get assigned for some reason, it wouldn't be so bad. My strike prices are such that I would get a pretty good yield. I've negotiated a 3% margin rate with my broker. So even if I get assigned and have to purchase on margin, the yield would more than cover the margin interest so I'd still be making money (assuming the companies don't cut or eliminate the distributions). So long as I avoid actual margin call (which would require a huge crash) I will be OK even if some puts get assigned (which is unlikely and has never happened yet).
Getting back to the original article, I am sure a lot of other people are using the current environment of low interest (margin) rates to leverage on high yield income vehicles like MLPs. For ones who overdo it, the recent crash would have caused margin calls and forced selling which is why high yield low trading volume vehicles like these can get hit more than the overall market on a short term basis as leveraged positions get unwound. MLPs have a short term beta >1 but a longer term beta of <1.
The risk here, of course, is a huge 2008 style market crash if I had to purchase all the positions I sold puts on and couldn't roll them forward or to lower strike prices. To purchase them all would put me heavily on margin, but so far I have never been assigned on a put. Except in an extreme market crash where people needed to raise money, I think I'm unlikely to ever get assigned even if they become in the money because I am selling puts 6 months or so out on high yield paying stocks/MLPs. From the point of view of the put holder, why exercise the puts now (unless in serious need of funds) when you are guaranteed to be able to do so at the same price later and still collect a couple of distributions in the meantime. That gives me time to roll out even further (if necessary to a lower strike price). In this way I can keep ahead of the curve without much fear of being assigned to. As mentioned, this might not work in the case of a severe 2008 style crash, so I'm careful not to sell more than I could purchase on margin even under my estimate of a worst-case scenario crash.
Each quarter I roll the puts forward and collect more time premium. As I do that I keep track of my 'cost basis'. I subtract the total value of all premiums received (as it increases each quarter) from the total strike price (strike price * # contracts * 100) for that MLP. Thus my 'cost basis' decreases each quarter, even though I haven't actually bought any units yet. My goal is for the 'cost basis' to get down to zero, at which point I might actually buy the units meaning I would have essentially got them for free (or I could just keep rolling).
I like this system as it means on top of my distributions from all the MLPs I own, I get a similar level of income (typically around 8%) from many MLPs which I don't own yet. This boosts my total portfolio return to well over 10% (based on current market value, not on my original cost basis).
On the other hand I don't like selling calls as I don't want to risk having my units called away. That goes especially for MLPs where if they were called away and I had to repurchase them, there would be a big tax hit. So I stick to selling puts in my taxable account. In my IRA I do sell calls.
don't know where this was pasted from but it raises some good points...
Of his 3 points, I agree regarding the first two (especially the first), but not the third (as he is not using the right valuation metrics for MLPs).
I can attest to his first point about leveraged income producing strategies as I have been using those same techniques myself (without being leveraged to the extent where I would need to unwind).
And as an example of the second point about panicked investors, we need look for confirmation no further than our own investor952 on this board.
Selling naked puts and calls does NOT cause margin calls. If it goes against you, you have a loss but no margin call. I use naked puts sometimes to buy the stock I'm interested in at a much lower, more attract price ,if the stock price goes down. If it does not go down I get to keep the put premium and never own the stock.
It's noteworthy that every single member of the Pres and VP economics teams have already left-- and you never hear about who the distinguished replacements have been.
The fact that the Pres has over the past year said that he recognizes the Fed budget deficit must be dractically reduced, but never provides any written plan screams loud at non-competence, while the non-partisan CBO issued a line that belongs in Saturday Night Live--"We cannot score speeches" http://www.weeklystandard.com/blogs/cbo-director-we-dont-estimate-speeches_575464.html
There is a reason for his avoiding any written plan, when his speeches say that the way to reduce the deficit is by increasing taxes on the rich-- because taxing the entire income of the "rich" however defined does not produce trillions of new dollars-- raising taxes cannot dent the increasing deficit of over $4B per day.
What has to happen is a drastic reduction in the size of Gov, and Gov programs that are bloated by trillions of dollars, but our Pres and the pols of both parties do not want to lose the votes of all of those now getting entitlement, welfare, and grants for foolish Green and other research.
Unfortunately, voting by the masses dominated buy takers of other people's taxes instead of by producers, abetted by a morally corrupt mass media, is turning America into a failing Socialist (read Greek) country.
No not at all. Looks to be a market rotation.
Might be able to stretch a case for KMP as the distribution coverage is thin(er). But EPD is running something like 160%+ coverage.
Not sure it is logical but the partnerships seems to have been banished with the cyclicals. Discounted American oil and gas will sell so I do not get a case for cyclical demand for the pipes.
Mr. Market is still not sure about LINE. So in my humble opinion it is a misprice. This however may underestimate the negative power of Obama / Progressives throwing bombs to save themselves.
The other more likely cause is Obama’s big (jobs) plan after the holiday. Pretty much Robespierre coming before the people to announce enemies of the state. As we all know are energy producers and ‘rich’ people.
We await his return from the land of trust fund baby progressives our anticipation and uncertainty may cause a double dip recession. The same old Obama negative feedback loop of failure and then blame casting.