Here's a strategy I'm considering.
UAN is an MLP that pays a cash distribution every four months.
UAN is about $90.
So the option strategy is sell $90 puts which expire after the next ex-div date. For example, the next ex-div date is between May 1 and 10, so sell short May $90 UAN puts.
Even if UAN is in the money when we head toward expiration, it's highly unlikely that the put option holder will exercise the put before the ex-div date. Exercise before the ex-div date, and the put holder must sell the UAN units to the person short the option, and then the distribution will be received by them. So.....the person who bought the put from me is likely to hold the put (if it's in the money) and exercise it AFTER the ex-distribution date.
As for me, I will roll the put forward three months before the ex-distribution date to an expiration after the next expiration date. So I buy back the May put, and sell forward the Aug UAN put. I get some small premium for that.
Here's why I like this strategy. The only way it doesn't work out is if the person I sell the put to exercises it before the ex-distribution date, and that's unlikely to happen since no one would do that because it's better for them to receive the distribution, and then sell their units via the option exercise. I roll the puts forward before the ex-div date, so it never gets exercised. Repeat, repeat, repeat, forever, each time capturing some amount of time value.
How does it not work? |
