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Tuesday Trades – PMT, SDLP, SXCP

I sold three covered calls today.

music selection: “Fortress Around Your Heart” — Sting

On Monday, I failed to sell covered calls in Penny Mac (PMT), Seadrill Partners (SDLP), and Suncoke (SXCP).  I went further out on the expiry today and found some liquidity.

PMT is one I’ve held for some time and written multiple calls against.  It trades in a tight range while paying a fat distribution, making it perfect for a covered call strategy.  I sold PMT170721C00017500 for 35 cents a share.  The trade will be in force for 124 days and yields 5.89% annualized.  The underlying distribution is another 10.97%.

SDLP is the best in class offshore drilling rig MLP.  With oil prices subdued, it is struggling and I may have to cut bait on this one and run.  Until then, I will try to reduce my risk and improve my returns with covered calls.  I sold SDLP170915C00005000 for 15 cents a share.  The trade will be in force for 180 days and yields 6.08% annualized.  The underlying distribution, which I am likely to collect, is 11.87%.

SXCP is an MLP provider of metallurgical coal.  Financial results are strong but the stock is struggling while the general partner makes low ball offers to purchase the remaining shares.  I expect shareholders to reject the offer and the price to recover somewhat.  I sold SXCP171117C00020000 for 40 cents a share.  The trade will be in force for 243 days and yields 3.00% annualized.  The underlying distribution pays an additional 15.23%.

Devour your prey raptors!

{ 3 comments… add one }
  • Chris B March 23, 2017, 3:25 pm

    The yields on those calls seem low, considering the volatility of the underlying. The gap between the prices of puts and calls seems large, and I wonder if it has been growing. This is counterintuitive because over the long run, markets usually rise. A long-range (e.g. 1 year duration) bullish position would be expected to outperform a bearish position, what, 75% of the time? I’ve seen a couple of articles suggesting this spread is growing, and suggesting that the demand for insurance is rising. Thoughts?

    • The Lizard King March 23, 2017, 7:05 pm

      According to Efficient Market Hypothesis, it is impossible (literally!) for the spread between puts and calls to diverge. In reality, the markets almost always have a ‘negative skew’ with puts being higher priced than equivalent calls. It seems fear is a more powerful motivator than greed. For this reason, I prefer writing puts to calls unless there is a juicy yield to collect on the underlying as with PMT, SDLP, and SXCP. I think with the CAPE at a long term high, that is going to be more true than ever until the market corrects or we see truly robust GDP growth and attendant corporate earnings growth to bring the P/E back in line.

      • Chris B March 23, 2017, 8:17 pm

        Agreed on the theory. The following might get the wheels turning on an arbitrage opportunity: http://www.theoptionsguide.com/understanding-put-call-parity.aspx

        I’m also writing OTM secured puts on S&P and Russell ETFs. I don’t mind getting assigned, but my annualized yields on this simple strategy are around 9%, which seems good considering how getting assigned will only give me a discount.

        Yet, the political environment and high valuations seem to make selling puts a risky proposition. Maybe others have concluded the same. I’m honestly considering riding out this entire administration in volatility spreads! They’re cheap, for now.

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