The bond market is now oversold, in my view, and with bond rates flattening out a bit recently, I think we could actually see a rally in Treasury bonds from current levels. And what I expect is that, as Treasury yields come down, interest-rate sensitive issues like REITs, utilities and other dividend-paying stocks are probably going to see a little rally and could fare better in this type of environment over the next month or so as their yields become more attractive to investors.
Within that group, pipeline MLPs are particularly attractive for a contrarian bullish play.
They got hit very hard last week as federal regulators issued some edicts concerning pipeline tax allowances, but Magellan Midstream Partners, L.P. (NYSE:MMP) joined several other MLPs in releasing a statement that the company “does not expect a material impact” from the new policy. So, in MMP’s case I think the impact has been overdone, and that’s what I’m recommending for a bullish position today:
Sell to open the MMP May 18th $50 put at about $0.30.
For those who may not have used this strategy before, with these naked put writes you want the underlying shares to move higher or at least remain above your strike price through expiration. This would allow you to walk away with no further obligation and full profits.
This is why I made sure to use a strike price of $50, which is very far from where MMP currently is now. So, the position has that advantage. But also the fact that interest rates have stabilized; MMP’s yield is over 6%, and I think that’s going to hold the stock up.
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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.