Kinder Morgan (KMI) has been following the glide path of an anvil this year. Apparently KMI stock has a date with zero, and it doesn’t want to be late.
Perhaps someone should kindly let Kinder Morgan know that zero is ugly as sin and should be avoided at all costs.
Or not. After all, there are myriad ways to profit from its continued misfortune.
Whether Kinder Morgan wises up or not remains to be seen, but the severity of the crash in KMI stock and the veritable explosion in its option prices presents an attractive opportunity for those willing to step up and trade.
Let’s unpack these a bit, shall we?
First, you don’t need to scour financials and recent news to discover something is amiss at Kinder Morgan. That message is being broadcast loud and clear to all but the blind who have seen KMI’s stock chart for more than a nanosecond. Kinder Morgan shares are down a harrowing 58% year-to-date, and we’ve still got another month to go.
Click to Enlarge
Second, in the short run, KMI stock is oversold by virtually any measure. Contrarians the world over are wondering if the time to strike is at hand or if it’s a suckers bet to buy KMI down here.
Fortunately, if you have an opinion on the eventual outcome, I have a trade idea or two to help you rake in the dough if you’re right.
Third, with implied volatility understandably through the roof, option prices are expensive these days. In structuring the pair of trades below, we’ll focus on spreads versus outright option purchases. By both buying and selling options, we can mitigate the cost — and therefore risk — of the position.
Twin KMI Option Trades for the Brave
Let’s begin our trade suggestions with the decidedly more tricky of the two — the knife catch. The difficult part of simply buying shares of KMI here is you have no margin of error. If you’re even a day early, you may have to sit through a 5%, 10% or even 20% drawdown before the recovery finally takes root. Being early on a knife catch is painful, so I prefer using a strategy that provides a bit of breathing room before the losses really rack up.
A bull put spread should do the trick.
Sell the Jan $15/$12.50 put spread for 33 cents or better. The max reward of 33 cents will be pocketed if KMI stock can remain above $15 for the next month. The risk is limited to the distance between strikes minus the net credit, or $2.17, and will be lost if Kinder Morgan falls below $12.50 by expiration. By risking $2.17 to capture 33 cents, the spread offers a respectable 15% return with a high probability of success.
For those thinking Kinder Morgan stock continues to get obliterated, buying March put spreads offers a fantastic potential return.
Buy the March $17.50/$12.50 put spread for $1.60 or better. The max risk is limited to the initial $1.60 and will be lost if Kinder Morgan sits above $17.50 at expiration. The max reward is a lofty $3.40 and will be captured if KMI stock can fall below $12.50 by expiration. By risking $1.60 to make $3.40, the spread provides the ability to double your money should Kinder Morgan really bite the dust.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
