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Annaly Capital Management, Inc. Message Board

  • dpsimswm dpsimswm Mar 16, 2010 8:00 PM Flag

    Use Covered Calls to Lower Downside Risk

    IF you are in this stock for the dividend yield, you are probably worried about market dips. Sell calls and lock in your selling price 12 to 24 months from now.

    http://www.troezen.net/2010/03/lock-in-a-possible-16-48-return-with-nly-leaps/

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    • That's a good article but it is an old one. It sites the last dividend as being 75 cents, but the last one was 65 cents. Still a good article and good idea.

    • if you bought at $16 and sold the $17.50 leaps, you are sitting pretty now

    • juanabefree@rocketmail.com juanabefree Mar 22, 2010 5:37 PM Flag

      I don't know, I'm feelin pretty good right now.

    • With NLY i'm hardly worried about market dips. I'm worried about interest rates.

    • OK, let's look at the option chain for NLY.

      An in the money leap, say the Jan'11 17.50, is priced (at bid) at 1.28. This gives a time value of only 10 cents.

      Divide that into 4 dividend paying periods and you get an extra 2.5 cents on top of the dividend. For this you may lose the long term capital tax rate benefit for stock you hold, plus all the upside in the price above 17.50. You do get some downside protection.

      If you go for more time premium, say with the 20 strike, you get a price of 37 cents, which is about 9 cents extra per dividend period. So still not very large, and this time you get less downside protection (though you keep the long term capital gains tax rate if you are eligible for it).

      All in all, consistent with what I said in my original post, that you get a few cents per dividend period extra with this strategy but with some disadvantages as well.

      The premium is just pretty small, no doubt driven down by the fact that NLY is a high dividend stock, and by the type of investor that is attracted to it.

    • One more clarification (based on my own understanding, which may of course not be correct!):

      If you write a deep in the money call against stock you already hold, you lose the tax benefit of the holding period for the stock.

      In other words, say you held the stock for more than 1 year, and if you sold today you could get the long-term capital gains tax rate.

      The moment you write the deep in the money call, it's as if you bought the stock today for tax purposes! So you have to hold it for another year (AFTER you close the short deep in the money call position!) to get the lower long term capital tax rate.

      So you have to be careful -- the same is true I believe if you buy a protective put.

      And for a stock like NLY, where the chance of being called away is significant because of the high dividend, you may then need to be prepared to give up the benefit of long term capital gains tax rate altogether if you decide to write a deep in the money call against the stock you already own.

    • I meant to say fasstcarman, not fasstcarnan (a typo). I was talking about the real fastcarman (sid), not that RN for M fasstcarrnan imposter.

    • Hello recon, although it is true that I've done pretty well with the covered call strategy over the past year, I should clarify a few things. This time around I was using only the 2011 $17.50 covered call leap, and I felt there was a pretty good chance that a sizable chunk of my shares would not get called at ex-div as a result. The more I thought about it, the more I wanted to lock in the capital gains rather than add more non-capital div gains along with a post ex-div share price decline. It is also important to point out here that after ex-div, the option premiums on calls widen considerably, and if you are using leaps it would make it especially hard to exit the share position without taking a capital hit that might more than wipe out the div (a non-issue if you plan to continue holding the shares for the duration of the leap or until the shares get assigned prior to some subsequent ex-div day).

      Although I almost certainly would have done better in terms of the option premium to wait until the day before ex-div to close everything out, once I decided that I did want to close it out I wasn't willing to tolerate even one more day of even very low risk. I was quite satisfied with my current level of equity in my trading account and also happy with how the 8k long term position in my investment account is doing, so I pulled the trigger in my trading account. Although I stand by my decision, those options premiums and puts sure did shrink today, rubbing it in my face that I would have done quite a bit better if I had waited even just until today to close out. C'est la vié. One thing I've learned about dealing with the market is that you don't need to be perfect, you just need to be good enough. Same with just about everything else in life as well.

      NLY will announce the div tomorrow (Thursday) after the close, in my opinion. I almost want to say "You can take that to the bank", but fasstcarnan (sid) might sue me for copyright infringement :-). (No offense, sid).

    • Wayne, I believe your take on it is correct, at least that's the way I've been doing it.

    • OKAY, but in his case he wants to be called in to get the decent premium - im thinking leaps and dont get called in, and as dpswim or whatever his name is, suggestd, lock in a price, with large downside protection, by selling a depp in the money leap and then if it doesnt get called (thats the challenge) collect the dividend.

      thats what im thinking, nomead how are you running this and are you able to get much size on say 200k dollars, which would equate to say 10k shares or so, and thus 100 contracts, - problem is i dont see much open interest out there for jan 12 for this to work.

      but there is larger open interest in stocks like t and vz, and such but of course a lower dividend, so wouldnt produce as much there.

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NLY
11.48+0.15(+1.32%)Jul 28 4:00 PMEDT

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