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Annaly Capital Management, Inc. Message Board

  • chubin chubin Apr 12, 2012 6:07 PM Flag

    I hope this isn't a silly question

    Why shouldn't I sell the Jul 2012 16 put for 85 cents?

    Isn't my exposure the same as being long up to 16. And with a potential profit of 85 cents? Even if the shares don't move from today's close, would I not collect 64 cents?

    Thanks for feedback.

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    • <<Isn't my exposure the same as being long up to 16.>>

      No. The short premium is marked to market and cash taken to cover any loss. In a market meltdown, an NLY flash crash, or both, you may be bought out of your position if you do not have sufficient cash in your account. With short options, the brokerage firms frequently don't even call. Why? Too busy buying in other short positions to make sure the firm does not lose money.

    • if person A. bought the stock at $15.79, (and held it to june ex-dividend they will get the June dividend of say 0.53 cents + they get it 0.21 cents cheaper to someone buying it at $16...

      that totals $16.53... or a profit of 74 cents (assuming everything else is equal sells the stock at $16.00 the June ex-dividend day because lets say the stock is trading at $16.53 the day before, because it will be that or more :0).. locking in the 74 cents. (not counting commissions here but figuring in extra commission for the put seller for what extra is paid over what the stock seller would pay in calc.)

      if person B. sells a put, they pocket $0.85, Minus a couple cents each for the buy and sell transactions over what they would for just the normal buy and sell of the stock.... so that is a profit so far of 81 cents (so far)

      so June 28th rolls around (ex-day) let's say the price of the stock will be at that time $16.53 the night before ex-divy.. (because it will :0)... and the day of ex-dividend day, the stock will be trading at $16.00... lets say the put is trading for 15 cents on that day... because it will be... :0) person B. buys it back, to lock in his/her profit of 66 cents....

      which made more, Person A or person B? for that scenario.

      lets say Person B, holds the puts to expiration instead and pockets the full .81 cents... well they made an extra 7 cents for an extra 3 weeks of risk..... not a very good trade off...

      (you could also look at it this way, Person A "puts" person B all of person "A"'s shares on June 28th, there by locking in person A's profit, and giving Person B three extra weeks of risk, if they so choose to hold the stock to july option expiration)

11.07+0.12(+1.10%)Jun 30 4:04 PMEDT