President Obama has rejected the proposed Keystone Pipeline project. The news was welcomed by environmentalists, but highly criticized by the oil industry. The administration said that TransCanada’s application for the 1,700 mile pipeline was denied because the State Department did not have adequate time to complete the review process. The battle for the pipeline is not over but this decision will certainly delay it even if it is eventually approved.
Lipow Oil Associates, a Houston based oil industry consulting firm has identified a few companies that could potentially benefit from the rejection of the Keystone pipeline. One of them is Enbridge Energy Management, symbol EEQ. Lipow reports that EEQ stands to benefit because it already has a pipeline system in place from Canada to the US that can be expanded without any additional permitting.
Fundamentally, EEQ has a neutral to outperform rating from various analysts. Standard and Poor’s has it rated a three star, Ned Davis research has it at neutral and data from Reuters Research shows that most analysts currently have it rated as an outperform.
If Lipow’s analysis is correct, a long position in EEQ could yield some decent profits over the coming months. The synthetic long stock position makes a lot of sense if their opinion is accurate.
Currently the stock is at $34.75. The August 35 put has an implied volatility of 25.5% and the August 35 call has an IV of 19.7%, the difference in IV between the call and the put makes the synthetic long stock trade attractive. EEQ does have thin volumes and large bid/ask spreads on the options which does make it more difficult to trade. If you were to open a position now and sell the put at the bid and buy the call at the ask the resulting position would be put on for a credit of 0.65 cents, or $65 per contract. Because the spreads are wide, it’s generally best to put an order in somewhere in between the bid and the ask on both sides and wait to get filled. It can take a while to get your fill but it is worth it. At current prices if you could get filled at the midpoint between the spreads the net credit received would be $1.65 or $165 per contract.
These wide spreads present some challenges and many traders avoid thinly traded issues because of liquidity concerns. The concerns are valid, once your position is established if something goes wrong with the trade it can also be difficult to get out of. It’s worthwhile to be patient when opening the position and not pay the bid/ask but place your order somewhere in between the spreads, slightly below the midpoint can be a good place to start.
These kinds of options are one area of the market where small traders have an advantage over large traders and institutions. There’s not enough liquidity for the big players to use options strategies on issues like this, but small traders who trade in two or three contracts can enter their orders at favorable prices and get their place in the queue, when a larger order comes along it’s possible to get filled at prices much better than the posted bid/ask.