Do Rolling Blackouts Spell “Rolling In Money” For Covered Writers?
Those
of you out in California are certainly in a world of hurt. California’s
electricity blackouts and near-bankruptcy of two major utilities have certainly
captured the world’s attention. They
have captured our interest for good reason, as California is the seventh largest
economy, not simply some third world dictatorship.
California’s
Democratic Senator Dianne Feinstein announced she plans to introduce federal
legislation giving the U.S. energy secretary the power to set prices for
wholesale power on a temporary basis. A little too little, too late, but at
least the Senator is trying to do something. Unfortunately, the issue isn’t
either the two failing utilities, or the so-called deregulation that became law
in 1996. The issue is that none of California’s neighboring utilities will
sell power without guarantees that they will be paid. Once the legislature
addresses that issue and provides those guarantees, the blackouts will
cease.
As you can imagine, the energy crisis in California and the pending failures of Pacific
Gas & Electric
(
PCG |
Quote |
Chart |
News |
PowerRating) and Edison Int’l.
(
EIX |
Quote |
Chart |
News |
PowerRating) has spiked
volatilities in both utilities. EIX has fallen in price from $24 in November to
just 8 1/2 today. Likewise, PCG tumbled from $28 to $9. For the brave, they might want to look at the EIX July 7 covered write. Buying EIX at 8
1/2 and
selling the July 7 1/2 call for $4 means they’re just investing $4.50. If they bought 1000 shares and EIX fell to zero,
they’d lose $4,500, plus commissions.
If, however, EIX finishes $7.50 or higher, they make $3 on a $4.50 investment,
which comes out to 66%! It’s not free money, but it’s mighty attractive.
Here
are today’s index volatility numbers:
