Compared with AGNC, the volume of options trades for MTGE is a lot lower. Are you concerned that you might not be able to sell the options (assuming you want to close out before the automatic exercise) at a reasonable price, and instead have to exercise them and purchase the stock to do it? I'd consider buying some Mar25 puts, but I wouldn't have the funds to actually purchase enough stock to exercise the options. I'm new to options trading, so I'm trying to understand the risks in this situation.
Buying Puts is almost always a bad idea prior to EX on these mReits. The reason: The dividend is priced into your premium prior to the EX, and it comes out of the premium on the EX day.
A couple years ago when Ben, myself and others were buying Puts prior to the EX, we found out, in short order, that you suffered a loss because of this reduction in premium. Yes, the spo will help. Do you want to risk the chance it won't happen, especially in a mReit Bull market?
Look at my other post, on this thread, to Gearhead re. this same thing. Even with AGNC's spo, the Long Put holders barely BE(broke even) on the spo. It is almost always a non-starter.
I have been "cooking my Puts" this AM to do the very opposite. I am going to Short the Sept25Put for 3.80-4.00 on Monday, if I can get it. I figure they won't be worth much different on EX day or spo(as I have just explained), so I will grab 1/3 position Monday, 1/3 on EX and 1/3 if spo. I expect Monday to be one of the highest.
As PPS revives, after these events, the premiums will fade and September should deliver 4.00. If not, I will be happy to own MTGE at 21.00.
BTW...>>I wouldn't have the funds to actually purchase enough stock to exercise the options>>
First try offering a bid at par, when you are ready to sell. That means if the PPS is 22.00 and you have a 25Put, and the bid/ask is 2.50/3.50, bid 3.00, which is par, in this instance(25-22). I have almost always been hit.
If that doesn't work pre-check with your brokerage to see if they will allow this:
If you have a margin account, you should tell your broker that you want to first purchase (say you have 10 contracts) 1000 shares of MTGE at the current PPS. That will lock and secure your price against your 25 strike.
Tell them next you want to turn around and exercise your Puts against the Long shares.(From what you said I don't think you realize that when you exercise a Put , you are Short the shares, not Long).
So, when you exercise your shares you are short 1000 shares from 25.00. The broker already purchased 1000 shares Long at the 22.00 PPS (say). So, since you cannot have both Short and Long shares of the same security in your account(retail investors) the shares wash, and your gain is the difference between the two, or 3.00. Subtract what you paid for the Puts and that is your profit.
Many brokerage houses will allow this transaction even without sufficient cash to do so, IF you tell them B4 hand what you want to do. So check with your brokerage house.
$10000 will purchase 41.67 contracts $10000 will purchase 30.30 contracts
Purchasing before XDIV gives 37.5% more contracts
>> Buying Puts is almost always a bad idea prior to EX on these mReits. The reason: The dividend is priced into your premium prior to the EX, and it comes out of the premium on the EX day. <<
I think I might not understand exactly what you're saying by this. Let me give an example using today's data.
Monday (today) MTGE=$23.22 purchase Mar25 put for $2.70 Break Even = $22.30
Tuesday (XDIV) MTGE=$22.32 purchase Mar25 for $3.60 ($2.70+$0.90) Break Even = $21.40
The difference I see between the two is that purchasing the puts before XDIV gives more contracts for the same investment. Each scenario will require that the price from the point of purchase drop $0.92 (23.22-22.30 and 22.32-21.40). I understand that a $0.92 drop is a different percentage drop from each starting point, but I doubt it makes that much of a difference, no?
Purchasing the puts before XDIV would give a (3.60/2.70) 33% increase in the number of contracts owned.
What am I missing?
Thanks Doc. Given your warning I'll probably hold off this round and keep track of what happens to the various prices. I'll use the time to continue understanding all of the conversations here.
If you buy a put before xd and the strike is in the money. If it is deep in the money, the price of the put would drop[on xd day] by dividend amount. yes/no?
If your put is at a strike , say at or slightly below the money, the dividend adjustment would be on some nonlinear proration? yes/no?
Suppose you are just below the money on your strike and the option last sold for less than the dividend. Example. zyx is trading at 50. It pays a divy of 1.00. Day befor xd you pay .50 for 49puts. That put would not drop to zero. y/n?
So after pps recovers in two months to 50+, then you are sitting on puts that are now in the money by 1.00 and you are looking a profit of .50+ y/n?