If you’re attracted to Energy Transfer Partners LP (NYSE:ETP) for the income potential, look elsewhere — namely a put credit spread strategy on ETP. Let me explain.
Let’s cut to the chase as it relates to most investors looking at ETP stock. Energy Transfer Partners has a very alluring dividend of nearly 11%, which it distributes to unit holders. Bottom line, it’s the type of payout which is going to attract investors interested in income in a low-rate environment.
Now, if Energy Transfer Partners was simply a stock, I’d be more than a bit skeptical of the yield. In fact, typically I’d run in the other direction, especially if I came across an analyst or other investor offering a well-thought out list of reasons why this time is different.
But ETP is an MLP, or Master Limited Partnership. Ultimately, MLP’s are designed to distribute their available cash to unit holders and in the process, offer significant tax advantages.
On the other hand, MLP’s like ETP have a very complex business structure. They’re also generally riskier than ordinary dividend stocks whose payouts rely on earnings growth and despite the favorable income spread have endured long periods of market underperformance.
Net, net I’m not entirely convinced by ETP stock as an income machine, and in reviewing the price chart, I’d say I may be more of a concerned contrarian.
ETP Stock Weekly Chart
Looking at the weekly chart of ETP, there is some supportive price and volume evidence for investors wanting to initiate a long stock position.
Specifically, a hammer candlestick positioned outside the lower Bollinger Band and massive overall volume the last several weeks as shares dropped in price suggest a bullish reversal in ETP could be close by.
Having said that and as stated above, I’m an unconvinced contrarian. My concern rests with two broken 62% retracement levels. A general rule favored among technical traders is if the 62% support level fails to hold, the likelihood of a full 100% retracement is increased.
I’m personally not a buyer per se of absolutes. In this instance, that would amount to ETP stock eventually falling all the way to its 2009 low of $4.60 based on the second price failure of its larger Fibonacci cycle. However, I wouldn’t rule out lower prices in ETP and a double-bottom test of the 2016 low near $15.50 given the slighter, but confirming, technical failure of the 2016-2017 cycle.
ETP Put Credit Spread
For investors still interested in generating above-market income and given my more cautious outlook on ETP stock, a below-market put credit spread is one way to participate with more durable risk control.
Checking Energy Transfer Partner’s options and shares at $19.53, the August $18/$17 put spread is priced for 20 cents mid-market and overall fits in nicely with what’s been discussed.
Income generation of just more than 1% for roughly a two month holding period isn’t on par with ETP’s yearly 11%-plus distribution. That’s the bad news.
The good news is the credit from this put spread on Energy Transfer still offers a very attractive source of above-market income of about 6%. As well, with an expiration-based margin of safety of about 9% and defined risk of just 80 cents, or just over 4% stock risk, the sum of all the pieces makes a whole lot of sense and more ‘cents’ to this concerned contrarian.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.