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Linn Energy, LLC (NASDAQ:LINE) closed Friday at $35.85 and could present a good long-term opportunity in the relatively turmoil-ridden markets. I have been holding a high cash position and am looking to deploy some of it in longer-term plays.

Linn Energy LLC has always done a great job of hedging its oil and gas production which has helped it continue with its high distribution level (dividends) and profitability, as oil and gas prices have been volatile if not substantially down as in the case of natural gas.

One of the complications with investing in the company is the annual K1 that gets filed - which probably is not a favorite with investors who have never dealt with K1s. However, with more and more ETFs going into K1s reporting structures, investor and tax software is helping to mitigate the resulting confusion. This does not help with the delay in filing, as one has to wait for all the K1s to be received.

One way of avoiding a K1 is to invest in Linn Energy through its option markets, thereby avoiding share assignment. Unfortunately, this means that one could never capture any of the distributions (currently at 8.10% annually).

One strategy I have always favored in this stock, is selling long dated puts just slightly out of the money and buying an OTM call spread with a small part of the proceeds. This gives some upside profit potential outside of the net credit received, reduces risk in comparison to market prices, and also delays the possibility of receiving a K1.

January 2013 options are the ones I currently like, though it does lower the potential profits from repeating this trade over a similar period of time with shorter duration options.

If one were to sell the $33 put options for $2.00 and buy the $36-$39 call spread for $1.30, then the net credit received would be $0.70.

If Linn Energy LLC were to be above $33 on January 2013 expiration, then the trade would at least return $0.70 in profits or a 2.18% return against the MVAR ($32.30 share assignment cost average). Margin requirements are currently around $500 for the short put and would produce a 14% return - which is much more acceptable. However, if the stock were to decline in value the margin requirements increase producing a lower return.

The trade would be much more profitable if Linn Energy were to be above $39 on January 2013 expiration. The trade would then return $3.70 in profits against the $32.30 MVAR or a return of 11.45%. In comparison against the current margin requirements, the trade would return 74%; however, as stated above, the margin requirements increase if the stock moves down in price and would result in a lower return.

The trade above would be in contrast to a simple covered call strategy one could employ. One could simply buy the shares in the company at $35.85 and sell a January 2013 $37 call for $1.30 and also collect possibly two distribution payments at roughly $1.45. The MVAR in the trade would be $34.55 and would decrease to $33.10 after collection of the distributions. The total profit (if above $37) would be roughly $3.90, but would be a 11.78% return in total.

This is slightly higher in comparison to the MVAR return in the trade above, but vastly lower than the current margin requirement return. This trade would be more profitable in terms of profit received if the stock were to remain flat, however, as you collected the premium and distributions. However, one would be receiving a K1 for their 2012 taxes.

Overall, I am bullish on the long-term prospects of Linn Energy and would consider using options to enhance the gains from the company.

Source: Linn Energy: Using Options To Enhance A Long-Term Bull Position