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Annaly Capital Management, Inc. Message Board

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  • xxavatarxx xxavatarxx Apr 12, 2012 8:34 PM Flag

    I hope this isn't a silly question

    jonkai3.. lets say the divy gets cut again which seems to be the trend.
    Then who do you think comes out ahead.

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    • you seem to have not caught the essence of what this person asked... this person wants to go LONG THE POSITION of the stock direction... not short the position... if one wants to short nly, buying that put would be quite disadvantages however...

      but lets examine what would happen to the two people in the scenarios...

      person A, buys at $15.79, receives dividend of an unexpected .44 cents... his position is now $15.35, the stock goes to $15.00 the day of ex-dividend.., he has a loss of 35 cents... sells....

      person B. shorts the put at 85 cents, with extra commission for being options instead of stock, that potential profit is 81 cents so far... the stock goes to $15.00 on ex-day, the put is now valued at $1.18, (probably more) (because now there is 3 weeks of now pure intrinsic time value left) he has to buy it back at $1.18, a loss of 37 cents....

      guess which person did better.... (person B's loss is 43% of what he "risked"...) person A's loss is 2.2% of what he risked.

      (by the way, i showed a divy cut in the original scenario, the one the market expects)...

      • 1 Reply to jonkai3
      • and also, it is not a silly question, it is an extremely difficult subject.

        the best way to think about it is: Options are like god, they know everything, and better yet, they are not dumb. you will never "outsmart" an option.

        the only way you ever will win with an option is:

        1. you guess correctly the future direction of a stock (and/or have insider information)... then you win big time... (otherwise you lose big time)
        2. you are a market maker and collect commissions on selling options to people who think they "outsmarted" the option.
        3. you use options as they were originally intended... as insurance against your valuable property. (which never has a small enough premium for a very high worth dividend(and it's mother stock))

        if you find away to hedge a high worth dividend, let me know... :0) actually there are, but i'm not talking...

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