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American Electric Power: A Potential 36% Return With This Low-Risk Strategy
AEP owns 80 major generating stations producing a total 35,843 MW of electric generating capacity. AEP has 52 coal-fired generating stations with 26,595 MW of capacity. Since coal and nuclear and hydro are base load sources while natural gas and oil are more peaking load sources, coal accounts for 86% of AEP's energy source, nuclear 6.4% and hydro 2.3%.
Senator Obama made it clear that he's against the use of coal
And as President has organized the affairs of the United States to carry out a campaign to close coal fired power plants, as shown by a recent Institute for Energy Research Rerport.
Attitudes toward nuclear power, following the Fukishima meltdown are also in play, which will one day soon lead to the closure of AEPs nuclear capacity, and the cost of subsequent clean up borne by the company.
So, with this clear liability in AEPs future, how does one implement the proposed Bull put spread in that case, given the likelihood of continuing series of surprises that adversely affect the company's long term value?
I mean from April 2007 to April 2009 AEP lost half its value. It has regained 88% of that value as of Oct 2012, yet the full impact of the coal plant closures and the liability of nuclear plant operations have not been fully accounted for in the company's balance sheet. They will be eventually, and with the excellent management of AEP it will not occur in a single day. It will adversely affect prices over time - leading to a long-term decline as from 2007 through 2009.
So, it seems to me on a fundamental basis, AEP is not your typical utility that quietly makes money from things people have to buy in a protected market. AEP more than many other utilities is facing the prospects of huge write downs in the near future to spark another long period of continuing decline.
In this instance a Bull put spread seems to me to be the worst strategy to use.
Of course, for anyone who thinks as I do, that AEP is setting itself up for a long slow period of decline, one can use a variation of what you suggest - call it a Bear put. That seems entirely possible.
Oct 6 06:26 PM
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