November 7th Options Now Available For Plains All American Pipeline (PAA)

A covered call strategy on Plains All American Pipeline LP (PAA), with the stock at $17.68 and an $18.00 strike call expiring November 7th, offers a potential 2.09% return if the stock is called away. Alternatively, if the option expires worthless (a 51% probability), the investor retains the stock and collects a 0.28% premium boost (2.40% annualized YieldBoost). The analysis also highlights a significant difference between the option's 59% implied volatility and PAA's 28% trailing 12-month historical volatility, providing context for yield enhancement and options pricing considerations.

Analysis

The article outlines a specific covered call options strategy for Plains All American Pipeline (PAA), presenting a quantitative breakdown for yield enhancement. With PAA stock at $17.68, selling the November 7th expiry call option at the $18.00 strike price generates a 5-cent premium. This strategy presents two primary outcomes: if the stock is called away at or above $18.00, the total return is capped at 2.09% before commissions. Alternatively, if the option expires worthless (a scenario with a 51% probability), the investor retains the stock and the premium, realizing a 0.28% return boost, which annualizes to a 2.40% "YieldBoost." A critical insight is the significant discrepancy between the option's implied volatility of 59% and the stock's actual trailing twelve-month historical volatility of 28%. This suggests that the option is priced relatively richly compared to the stock's recent price behavior, making the premium collected for selling the call option attractive, but also implying the market is pricing in a greater potential for price movement than has historically occurred.

Key Decisions for Investors

• For investors with a neutral to moderately bullish short-term outlook on PAA, this covered call strategy offers a quantifiable method to generate income, with an annualized yield boost of 2.40% if the option expires worthless.
• The significant premium of implied volatility (59%) over historical volatility (28%) suggests that selling PAA options could be an attractive strategy, as the market appears to be overpricing the potential for near-term price swings.
• Investors who are fundamentally bullish on PAA and anticipate a price surge well beyond the $18.00 strike should avoid this strategy, as it caps potential upside at 2.09% and would force the sale of their underlying shares.