Buy Write Pulls Dividends And Options Premium Through The Pipeline

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The U.S. has more than 2.6 million miles of pipelines. They deliver trillions of cubic feet of natural gas and hundreds of billions of ton/miles of liquid petroleum products each year.

Midstream companies are part of this enormous infrastructure. They focus entirely on owning and operating pipelines and other energy-related infrastructure. Because of how they’re structured, they generate a lot of cash, which makes them particularly interesting to income investors.

This buy-write trade on this Tulsa-based midstream energy company is poised to generate even more cash. Here’s the trade for Williams Cos (WMB).

Williams Cos. (WMB) – Buy Write

Buy 100 WMB

Sell to Open 1 September 30 $36 Call

Execute for Net Debit of $34.65 or lower

Tulsa, Okla.-based Williams Cos. (WMB) is a midstream energy company that owns and operates the large Transco and Northwest pipeline systems and associated natural gas gathering, processing, and storage assets. Revenue this year is expected to grow 2.4% to $10.9 billion, with earnings up 19.3% to $1.62 per share.

Williams has an ex-dividend date on September 8 for a $0.425 per share dividend. With the stock trading near $35.35, we will buy it and write $36 calls expiring in 36 days.

Here is the buy write: Buy 100 WMB ($35.34 current price) and sell-to-open one contract of WMB’s $36 September 30 calls for a net debit of $34.65 or lower. The net debit is the amount you are willing to pay for one share of stock minus the premium you earn for selling the calls.

If we earn the dividend and then if WMB closes above $36 on September 30, we will be assigned and compelled to sell at $36 per share. If this is the case, we would earn $1.775 per share on $34.65 at risk, or 5.12%. Over a holding period of 36 days, the annualized return would be 51.9%. If WMB closes at or below $36 at expiration, we would still own the stock at a cost basis of $34.225 per share, reflecting the premium earned today and the dividend earned in two weeks.

Anytime there is an ex-dividend date, there is the possibility that owners of call options will exercise their right to buy the stock to grab the dividend if the time value of the option is less than the dividend.

Options income for this trade: We earn $70 selling 1 WMB September 30 $36 call contract. Click here for updated bid-ask and return characteristics.

Please email me ([email protected]) at any time with questions about how to use Forbes Premium Income Report. — J.D.

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.