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American Capital Agency Corp. Message Board

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  • slegermark slegermark Oct 26, 2012 12:50 PM Flag

    OT: EPD

    options prices do not follow xdiv prices except for itm puts.

    you might think you can sell your itm calls in epd today and buy them back on monday for sixty cents less. They are likely to stay the same. I attempted this with MTGE this June and got mildly burned. The ones I did not sell, covered that and more after a couple weeks. ReikReik calls that a reacharound, when an equity pays off after xdiv. In epd my 50's paid off but my 52.50's have lost so much value I am willing to gamble them to earnings.

    EPD reports earnings next week. They could be the best managed MLP out there. Since their revs are fairly isolated from the vagaries of barrel pricing, I would look for increased earnings and outlook. they did partner with enbridge to reverse the seaway pipeline out of Cushing to the Gulf. This will have a positive impact starting mid third Q. It has led to a stabilizing of mid continent crude as well.

    Now, MLPs are supposed to be low beta, but the in and out sector rotation of late makes them very risky this year. Even with the positive GDP suprise this morning, we have another selloff.
    Like a true believer who is determined to follow illusion in the face of contrary evidence, the market is determined to act in fear.
    Kudos to Xion for the heads up closeout when epd hit 55.

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    • Sledge,
      Thank you for your thoughts.
      I'm willing to hold through EX, I like the "reach-arround". So, is it smart to buy some OTM protective puts in case the slide continues? if so, how do OTM puts get adjusted at EX?

      Thanks,
      Igster

      • 1 Reply to igsteri
      • I have gained and lost on otm puts for an xd play. It is all in the pricing. If the price of the put at one strike lower[for epd that is 52.50] is less than the dividend amount, then probability is in your favor.

        Right now the 52.50 put is about .80. If epd stays at 53.20 to the close then it will open at about 52.60. , so you get plunked right at the money for no intrinsic value. In spring I did this with LINE for a doubler. I just looked at the daily chart and it appears the market makers want this to land right on a strike.

        The question then, is .80 a good price for an at the money put with three weeks to opex? What you have then, if you keep your 52.50 calls is a straddle to opex. This is why I say the calls will not fall in price following xd, unless price continues down. The price would have to move by 1.50 approx to break even in any direction. This math is a very rough estimate.

        Being that earnings are less than a week away, a move in price is possible. In this bear sentiment market.... man, it could temper what should be a two point move after favorable earnings into a .7 move. Thrilling, isn't it?
        If you do get puts, go to a more distant month perhaps.

 
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