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.
“Shares of AMJ — whose top holdings include an array of energy names like Enterprise Products, Magellan Midstream, Williams Partners, Sunoco and ONEOK—have fallen 26 percent in 2016 and are sitting near five-year lows,” according to CNBC.
MLPs are not directly affected by oil prices since the sector acts more like an energy toll road and profits off crude oil flowing threw its pipelines. However, the recent selling pressure in the energy market spilled over to MLPs as traders feared the low prices would force producers to cutback on production, which would mean less volume going through MLPs.
JPMorgan Alerian MLP Index ETN
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.