Plains GP Holdings, L.P. (PAGP) is a midstream oil and gas company that delivers its product primarily via pipelines. The stock showed up on our list of compressed stocks this morning. We calculate the compression signals in two ways. We calculate using the stock price, and we also calculate using the stock’s total return. Because this is a limited partnership company where a large portion of the earnings are paid out in regular dividends, we’re going to focus on the signals that use total return calculation for this asset.
The total return calculation showed two previous signals that you can see below. The chart on the left shows a signal in 2018 where the stock jumped higher and didn’t look back. The chart on the right shows that the stock jumped initially, then dropped back down into profitable territory. If you used the method of exit that we teach in our ODDS Online Coaching, you could have made a profit on both legs of our neutral straddle strategy with the 2022 signal. If you are new or if you need a refresher, we will show you that method again in today’s coaching session at 2pm ET.
In this time series chart, it doesn’t take a calculation to see that share prices for PAGP are trending flat. While there is an earnings report expected before the November 15th options expiration, this stock does not tend to move big on earnings announcements. The stock price tends to move more when dividends change and when there is uncertainty in oil and gas prices.
Whether it’s the economy, the Fed, demand from China, disruptions in supplies caused by geopolitics, or unexpected deviations from seasonal factors, the path of energy prices is completely unpredictable and potentially volatile.
This Volatility Term Structure chart for PAGP shows us the implied volatility for the at-the-money options for each expiration. This chart shows that volatility expectations for expiring November 15th, are relatively low. That means options prices are also relatively low.
This MDM graph compares the modeled expected distribution for future stock prices (the orange line) with the actual distribution of PAGP’s share prices over the past 3 years (the blue histogram). You can see that the actual stock movement shows that PAGP tends to make big moves much more frequently than November options prices expect. This tells us that PAGP options expiring on November 15th are relatively cheap. This is an option buying situation.
This Volatility Cone chart for PAGP compares implied volatility expectations for each term to the historical volatility for that same term. The blue line shows the average historical volatility; the purple lines show each HV measure’s highest high and the lowest low over the past 3 years. You can see that all terms are below the three-year average. This confirms that PAGP options are relatively cheap.
PAGP share prices are compressed. The stock has a history of making big moves shortly after a compression signal. Options for the November 15th expiration are relatively inexpensive and there are many potential catalysts that could spark a big move in the next few weeks.
To get the specific details and prices on today’s trade ideas, be sure to read today’s ODDS Online Daily Option Trade Idea.
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Thank you,
Don Fishback
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