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EP News Delivers Option Trading Lesson

|Includes:Kinder Morgan, Inc. (KMI)

As a former employee of El Paso Corporation (EP), I have always maintained a token position in the stock, even though I really have never been too excited about it. My excitement declined even further when they reduced the dividend to 1 cent per quarter a couple of years ago. (Maybe management got confused and thought they were a bank!) Since I did not want to sell, I decided a covered call strategy would be appropriate, a strategy that I use often, although somewhat cautiously. I thus sold the October 2011 call with a strike price of $21.00 on February 28, 2011, for $1.01. At that time EP was at $18.70. After a long wait, I appeared to have a winner, with the option valued at about 3 cents last Friday, October 14. I actually considered buying it back, but upon reflection I decided there was no reason to be in a hurry, why pay an unnecessary commission?

Subsequent events have proven, once again, there are no "sure things" in the markets. I made a reasonable wager, waited patiently, resisted the urge to "ring the cash register" prematurely, and still ended up feeling like a loser. However, upon reflection, with my average cost around $18.37, I will come out OK. (I'm assuming I hold through Friday expiration and am assigned at $21.00, a pretty good assumption at this point.) Also, don't forget about all those 1 cent dividends I have collected.

There I go again, assuming I have a "sure thing" in the market. Anyway, the lesson to take away from this is that selling covered calls (or cash-covered puts) is a viable strategy, as long as you select a strike price such that you are fully prepared to honor the contract if required, and you accept that anything can happen. Compared to what I've been through with my EP stock since 2001, this was actually just a minor blip, but it seems that it will be a fitting end to my EP investing experience - not bad, not good, but always educational.    

Disclamer: currently long EP with all shares pledged via the October 2011 call with a strike of $21.00

Stocks: KMI