Stock Option Advisory

Options on Ethanol Related Companies in Light of Revamped Senate Energy Bill

The Senate passed legislation yesterday requiring the production of ethanol used in auto fuel to increase to billion gallons a year by 2022. The final production level would increase the level of ethanol production seven times the current level. Senate Majority Leader Harry Reid, in a widely covered press conference, proclaimed, “This bill starts America on a path toward reducing our reliance on oil.”

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Senate Republicans did have something to cheer about as they managed to block $32.1 billion in tax incentives earmarked for renewable energy. The funds would have come primarily from increased taxes on oil revenue. Republicans stated the new taxes would be an impetus for oil companies to move away from American oil basins and would drastically increase gasoline pump prices.

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Senator Larry Craig of Idaho, a Republican against the plan, stated, “It’s very easy politically to stick it to the big boys and that’s the political game that’s being played out on the floor of the United States Senate.”

The measure also calls for boosting auto fuel economy to a fleet average of 35 miles per gallon by 2020. This new standard is nearly a 40 percent increase over current requirements for cars and SUVs.

Companies Related to Ethanol:
Archer Daniels Midland (ADM) currently controls about 25% of the ethanol production in the US. Around 25% of the company’s profits come from ethanol and the sale of ethanol byproducts. ADM is also spending billions of dollars ramping up its ethanol production capabilities and expanding into the European market.

Pacific Ethanol (PEIX) hopes to have five ethanol plants running in the Western US by the end of 2008. Pacific currently markets ethanol in California, Nevada, Arizona and Oregon. Its first plant, in Madera County, Calif., is currently under construction and will be completed by the end of the year. Analyst Paul Resnik of Dutton Associates noted in a statement to investors, “Pacific Ethanol is positioned to achieve substantial growth starting in late 2006. We believe that the company can turn profitable in 2007 and generate significant earnings in 2008 and beyond.” The analyst has the company’s earnings per share at $1.21 in 2008.

MGP Ingredients (MGPI) develops and produces natural grain-based products in the United States. The company is also an ethanol producer.

Looking at this News from an Options Trading Perspective:
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Potential Trades:
All of the following option trades have 58 days until expiration. These trades were discovered using the powerful suite of option search tools found at PowerOptions.

PowerOptions covered call search Ethanol Stocks (59 days)
ADM $33.83 ADMHG 07 AUG $35.00 $1.05 3.10% 3.20% 6.80%
PEIX $12.25 PFQHV 07 AUG $12.50 $0.65 5.30% 5.60% 7.80%
MGPI $15.90 MQKHW 07 AUG $17.50 $0.35 2.20% 2.30% 12.50%
(For more details click the ticker symbol above)

The ADM trade involves the August $35 call option and offers 3.1% downside protection and 6.8% potential profit if the stock is above the $35.00 strike price at the end of the option period. The stock is currently trading at $33.83.

Competitors for ADM include: Bunge Ltd. (BG), Corn Products International Inc. (CPO), Cargill, Incorporated (private), Andersons Inc. (ANDE), Aventine Renewable Energy Inc. (AVR), Buckeye Techs. Inc. (BKI), MGP Ingredients Inc. (MGPI), Pacific Ethanol Inc. (PEIX), VeraSun Energy Corp. (VSE), and Xethanol Corp. (XNL).
The Pacific Ethanol trade involves the August $12.50 call option and offers 5.3% downside protection and 7.8% potential profit if the stock is above the $12.50 strike price at the end of the option period. The stock is currently trading at $12.25.

Competitors for PEIX include: Archer-Daniels-Midland Co. (ADM), Ag Processing Inc (private), and Melrose Resources plc (private).
The MGP Ingredients involves the August $17.50 call option and offers 2.2% downside protection and 12.5% potential profit if the stock is above the $17.50 strike price at the end of the option period. The stock is currently trading at $15.90.

Competitors for MGPI include: Archer-Daniels-Midland Co. (ADM), Grain Processing Corporation (private), and National Starch and Chemical Company (private).
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[tags] Harry Reid, Larry Craig, Idaho, SUV, ethanol, California, Nevada, Arizona, Oregon, Madera County, Paul Resnik, Dutton Associates, Cargill, Incorporated, Ag Processing Inc, Melrose Resources plc, Grain Processing Corporation, National Starch and Chemical Company, ADM, Archer-Daniels-Midland Co., ANDE, Andersons Inc., AVR, Aventine Renewable Energy Inc., BG, Bunge Ltd., BKI, Buckeye Techs. Inc., CPO, Corn Products International, MGPI, MGP Ingredients Inc., PEIX, Pacific Ethanol Inc., VSE, VeraSun Energy Corp., XNL, Xethanol Corp., covered call investment strategy, investment strategy, iron condor, options trading, poweroptions, stock option trading, stock options [/tags]

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