Make Kinder Morgan Inc (KMI) Stock Pay You Big Dividends Again

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In October 2016, I shared a Kinder Morgan Inc (NYSE:KMI) trade that yielded more than 60% on money risked. That iron condor range turned out to be near-perfect, so today, I want to sell more risk on KMI stock ahead of its first-quarter earnings report after Wednesday’s bell.

Make Kinder Morgan Inc (KMI) Stock Pay You Big Dividends Again

Fundamentally, Kinder Morgan seems pricey given a price-to-earnings ratio of nearly 90. KMI shares have a decent dividend of about 2.3%, but obviously that’s nothing like what investors were used to years ago. Now, it’s low enough that rising interest rates are a real threat.

Today’s bet, however, is meant to trade Wall Street’s perception of KMI’s fair value, not my own assessment of it. And I want to sell risk against support levels that are likely to hold through 2017.

Technically, KMI stock is in the middle of a fairly wide 10-month range and just above a well-consolidated zone. Both of these should provide defense to the bulls.

KMI stock chart view 1
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For the short-term, I do have to recognize the potential threat of a bearish technical pattern. Losing the $20.60 per share level could invite momentum sellers all the way down to $19.80, which was the last serious support level.

My position will allow for that much room and more.

How to Trade KMI Stock

The bet: Sell the KMI Jan 2018 $17.50 naked put. This is a bullish trade for which I collect 80 cents to open. But by doing so, I commit to buying the shares at $17.5 if Kinder Morgan falls below it. This is risky, but I am leaving an 18% margin for error from current price which translates into an 85% theoretical chance of success.

Selling naked puts is not suitable for all investors. That’s OK. I can change this trade into a credit put spread to make it tamer.

The alternate: Sell the KMI Jan 2018 $17.5/$15 credit put spread. This too is a bullish trade with the same chances of success, but one where the risk is finite. Yet if successful, selling the spread still yields 19% on money at risk.

I am not required to hold my trades through expiration. I can close either of them at any time for partial gains or losses.

Learn options as easy as 1-2-3 here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/kinder-morgan-inc-kmi-stock-big-dividends/.

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