Dividends And Premium In The Pipeline With Kinder Morgan Buy Write

If you own at least 100 shares of a stock, you’re able to sell call options on that long position and receive a premium for doing so. The downside is that you surrender the ability to participate in gains beyond the strike price of the calls.

This income generation strategy is known as selling covered calls. If you buy a stock and simultaneously sell call options against it, that’s a buy-write: buy stock, write (sell) call options. This strategy is optimal for earning income in situations when stocks trade in a range without making making major moves higher—or lower, since you still own the stock.

Each time you sell covered calls on a stock, it reduces your cost basis. Do it repeatedly and you can whittle down your cost significantly. Total return is the objective, and regular dividends help to juice returns.

On September 8, we did a buy write on shares of energy infrastructure company Kinder Morgan
KMI
. We still hold the stock at a $17.35 cost basis. KMI currently trades just above $17.40 per share. We’ll write December 2 “weekly” calls on KMI for at least $0.30.

With an ex-dividend date coming up on Friday, October 28 for a $0.2775 per share payout, Kinder Morgan, if you don’t already own it, looks good for a buy write that offers total return potential of almost 7% over the next five weeks. – J.D.

Kinder Morgan (KMI) – Buy Write

Buy 300 KMI

Sell to Open 3 December 2 $18 Calls

Execute for Net Debit of $17.10 or lower

Houston, Tex.-based Kinder Morgan (KMI) operates pipelines that transport natural gas, crude oil, carbon dioxide, gasoline and other refined products and chemicals. Its network also handles bulk materials like ethanol, coal, petroleum coke and steel. In Canada, it operates the Trans Mountain pipeline transporting crude oil and refined products from Alberta to terminals and refineries in British Columbia and Washington in the U.S.

Last week, Kinder Morgan reported third-quarter revenue of $5.18 billion, which topped Wall Street’s $4.66 billion estimate, but earnings of $0.25 per share fell slightly short of the $0.29 forecast.

Kinder Morgan does not post quarterly results again until January, and there’s an ex-dividend date this Friday, October 28. Own the stock through Thursday’s close, and the $0.2775 per share dividend is yours.

Here is the buy write: Buy 300 KMI, and sell to open 3 contracts of $18 December 2 (weekly) calls for a net debit (stock price minus options premium) of $17.10 or lower.

For this buy write, if KMI closes above $18 at expiration on December 2, you would earn $1.1775 per share (including the dividend) on $17.10 at risk, or 6.79%. That would be an annualized return of 68% over a holding period of 37 days. If KMI closes at or below $18 on December 2, you will still own it at a cost basis of $16.82 per share, reflecting today’s premium and Friday’s dividend.

Options income for this trade: $90 selling 3 KMI December 2 $18 call contracts. Click here for updated bid-ask and return characteristics.

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John Dobosz is editor of Forbes Dividend Investor, which provides a weekly portfolio of high-yielding, value-priced income stocks, REITs and MLPs, and Forbes Premium Income Report, which sends out options-selling trade recommendations on two dividend-paying stocks every Tuesday and Thursday.

NOTE: Forbes Premium Income Report is intended to provide information to interested parties. As we have no knowledge of individual circumstances, goals and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any assets or securities mentioned or recommended. We do not guarantee that investments mentioned in this newsletter will produce profits or that they will equal past performance. Although all content is derived from data believed to be reliable, accuracy cannot be guaranteed. John Dobosz and members of the staff of Forbes Premium Income Report may hold positions in some or all the assets/securities listed. Copyright 2022 by Forbes Media LLC.