Exchange traded products tracking master limited partnerships (MLPs) are getting drubbed again this year, but the once beloved, income-generating asset class still has some supporters. Specifically, JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ) appears to have some support in the options market.
Investors are worried that a traditionally attractive dividend-paying asset would no longer be able to maintain its steady payouts as U.S. oil output starts to decline after the steep drop-off in crude prices. In the recent crude oil sell-off, investors did not distinguish MLPs from other energy-related assets and dumped the asset as crude oil prices plummeted.
Looking at AMJ, “a trader purchased 50,000 of the January 2017 30/40 call spreads for 80 cents each. Since each call option accounts for 100 shares, this is a $4 million bet that the AMJ will rise as high as $40 in less than 12 months. That’s a near 90 percent move from where the ETN was trading on Thursday, around $21,” reports CNBC.
MLPs primarily deal with the distribution and storage of energy products, so their business model is less reliant on the commodities market since MLPs profit off the quantity of oil and natural gas they are able to move around. Consequently, MLPs have historically shown a weaker correlation to energy prices over longer periods as MLPs act more like energy toll roads, profiting on the volume of oil moving through their pipelines.
Some market observers are concerned that some of the holdings in AMJ and other MLP exchange traded products could follow Kinder Morgan (NYSE: KMI) and slash dividends as an avenue for conserving cash.