Good Morning Brian,

Disclaimer: I've got absolutely no knowledge of Enterprise Products or their prospects. That said, here's my stream of conscienceness thoughts on the strategy. Others may differ with uproarious laughter.


1) A covered call strategy is best viewed as a total position with a stock you don't mind being called away at the strike price. A pure covered call would look at continuous rolling over of the position to improve income from the position.

I've posted this before (maybe on this board - don't remember), but there's an interesting Canadian product available as an exchange-traded fund comprised of the top 15 dividend-paying companies on the TSX. Those underlying companies have an average yield of 3.2%. The ETF is currently paying out 7.4%. It is comprised of nothing more than a portfolio of those 15 stocks - so how are they paying out 7.4%? The answer is that the managers are employing a total-position covered write strategy, taking new positions in stocks that are called away, and rolling over calls that expire worthless. The prospectus is worth glancing through to see their strategy: http://www.dividend15.com


2) The presented return here is not what I would consider especially attractive for a covered call strategy, even if you are proposing the same strategy as the Dividend15 guys (new positions if called away/rolling over worthless options).

Looking at the March 17 expiry, you're looking to receive two dividend payments, the call premium, and the difference between strike and stock price.

Total Return = ($0.42) * 2 + $1.00 + ($25.00 - $24.79) = $2.05

%Return = 2.05/24.79 = 8.27%

Time to Expiry = 174 days = 0.48 years

Annualized = 18.1%

It's not bad, especially, as I said, if this is a continuous strategy and not a one-off. But I'd be really looking hard at what the frictional costs would do to your return. For example, if I'm paying the exhorbitant prices that E*Trade charges me on a single contract, buying and selling the stock (when assigned) as well as the option commission, I drop my period return to 4.9%, and the annualized return to 10.6%. (And I'm not accounting for taxes here - add those if you're not in a sheltered account). So to get the higher target return, I need to minimize commisions by buying more contracts - how many can I afford, is the question.

Compare the above return to analyst's expectations (and I know, that might be rather silly). They're calling for a 1-yr target price of $30.70. So the total annual return if their forecasts are decent, would be [$1.68 + ($30.70 - $24.79)]/24.79 = 30.6%. So it would seem that just buying the stock might be a better choice.

That is, of course, if the dividend is safe. Then again, if the dividend were not stable, it would impact both strategies negatively.

Cheers,

Jim