How many on this board would risk buying 1000 contracts @.20 (Dec $29.00) costing $20000 right after the recent offering? The profit would be $55000. I wish I would of done that I only bought 10 contracts. Is the risk too high? Maybe I'm beeing too gready.
Except, you have to remove one 0. My example was based on more than one contract.
1000 x 3.80 = 3,800 (that is 10 contracts) 10 x 100 = 1,000
1,000 x 3.80 = 3,800.
In my example, I said one contract. One contract equals 100 shares.
100 x 3.80 = 380.
Still the point remains.
I have two kids running around me, and I get a bit frazzled posting all of the time. Yes, I made a mistake, but the principal remains the same. Just add another 0. One of the issues I have with posting is I can't cut and paste from spreadsheets, which would increase my accuracy 100%. So, as long as the principle is correct, then the ideas are in tact. Yes, 1 contract equals 100 shares, so just take some zeros off.
I posted a very similar analysis last quarter, except I went 3 weeks back from EX-Div, instead of a full month.
My conclusion was pretty much the same -buying about a week before the dividend announcement consistently yielded strong gains. The last few weeks of the quarter are the hottest.
I am a bit tired now to run the numbers again, but it would be interesting if someone would calculate the percentage (and dollars gains) going back 2 weeks, 3 weeks, and 4 weeks, prior to the day before Ex-div for this stock over the past year or two.
You did a nice job for Olee with your example but some of the zero's are wrong:
"Each contract equals 100 shares, so you have to buy a minimum of 100 x $3.80 or $3,800." He would pay $380/contract
"You can buy more out of the money, like the March 29's, which are $1.10. So, that would only cost you $1,100 for 100 calls"
Technically those Mar 29's are less ITM(in the money) than the Mar 26's not more OTM(out of the money) because they are both ITM since their strike price is less than the PPS. Finally,each call costs $110 x 100 = $11,000 for the 100 contracts in your example.
Hey my math was wrong yesterday. Thanks for sharing and making me feel better ;-)
That was a great description for Olee. I give it a 5 Star Rating, but I don't know how to turn on the stars. I have submitted my application for option trading and hope to start soon. I would suggest that Olee take the on-line course from OIC and/or get a book like Options for Dummies to provide an academic background to go with his option trading experience. Buying one contract is a great idea. Nothing helps the learning experience like a little skin in the game. I commend you for helping those of us who lack your expertise and experience. Thanks and GLTA
Olee, the first thing you need to do is apply for level 1 options. Once that it is done and you are really wanting to give it go, let me know and we can walk you through it. Watch it now (just watch the call prices on yahoo as the stock moves). Maybe, if you get set-up, you can do it next quarter.
I am not promoting this idea for you to take some huge risk, but to learn to make more with less. YOu can control the leverage you take on. Options allow us small guys to punch above our weight. I would view it as a supplement to your basic stock picking skills and knowledge of AGNC.
You can also sell covered calls too, assuming there is a good target. There are several conventions I use (and break all of the time):
1) Buy ITM (option price less than stock price);
2) Buy far enough out to more than cover the dividend declaration and ex-dividend
3) Sell before earnings or before declaration of dividend, unless you have to consider otherwise
4) Sell when the profit margin hits 10% or better unless you can justify staying in.
Calls have a lot more volatility than the shares, so you find yourself agonizing over a $.10 fall sometimes. That is just the way it it is.
There are some on the board who would disagree with my conventions, and I respect that too. However, an option loss can set you back by a lot if you get it wrong.
The more ITM and the longer the date, the more relaxed you can be about it. I always pay for the extra quarter.
There is something else you need to know which is a real economic issue and also affects psychology. When you buy a call (or a share) there is bid/ask spread. AGNC's calls are considered thinly traded, which means there isnt' as much liqudity as say APPLE. Your account will show a loss until the stock prices covers your instrinsic price.
So, tomorrow just look at the following just to learn (not to trade);
March 18 calls, Strike $26. Cost $3.80. (Bid $3.50).
The intrinsic is $26 plus $3.80 = $29.80
The share price now is $29.60.
$29.60 - $29.80 = (.20) loss.
The stock has to rise to more than $29.80.
The commission costs are about $15.
Each contract equals 100 shares, so you have to buy a minimum of 100 x $3.80 or $3,800.
So, if the underlying hits $31:
$31 - $29.80 = $1.20
Cost 100 x $3.80 = $3,800
Commission = 16
Value .100 x $5.00 $5,000
Profit percentage 31%
Underlying Increase 31.00 - $29.60 = $1.40
Underlying percentage 5%
So, a 5% increase yields a 31% call return.
Your risk of loss is $3,816.
Would you lose it all? Probably not, unless the stock falls to $20 or something or you let the option expire.
The impact of the bid/ask spread on your acount. Until your day of profit, you will have a negative amount in your account for the spread. The dealer is asking $3.80, but if you turned around and sold them straight away he would only give you $3.50.
For your investment of $3,816, you will be down by the spread or about $763. You just have to get used to this issue.
This is why you want (at first - and still true for me today) deep ITM. You want the call to be very responsive to an increase in the price of the underlying price.
The more in the money, the more money you have to put at risk or the higher the cost of the option. It make sense. YOu bookie will charge you more for a sure bet.
You can buy more out of the money, like the March 29's, which are $1.10. So, that would only cost you $1,100 for 100 calls, but your intrinsic is $30.10, not $29.80. That is a big deal in the world of calls. However, your return in the above example, will rise to $31 - $30.10 = .90/$1.10 or 82%. So, by buying OTM calls, you get a much better return. The 5% increase results in an 80% return.
G55 I like to trade this stock like you. If I can get more than the div, why not take it? Especially since the div is not for sure. That last day of month before ex i must check out.
Last quarter the stock went down on the day before the ex, but this was an exception. The high range has been 4 to 5 days before th ex. Thanks for the stradegy.
I just want to point out that even when AGNC did cut their dividend from 1.20 in December 2008 to .85 in March 2009, the stock price still moved from 16.30 on Feb. 27, 2009 to 17.81 on the day before ex (March 30th).
I like the strategy of buying near the opening bell on the last day of the month prior to ex-dividend date, and selling on the day before ex-dividend around close. If this strategy was used, here's the gains you would have realized on the stock price during that period during the last two years:
September 2010: +2.19
June 2010: +3.24
March 2010: +3.01
December 2009: +2.45
September 2009: +5.28
June 2009: +4.25
March 2009: +1.51
Given this history, I'd say a $2 run from $29.43 (open price on November 30th) is not only completely possible, but pretty likely. Especially given how fast the stock recovered from the shares released last week, I think we're going to be in a strong upward trend until the ex date. Personally, I trade options... with a stock this predictable, I think call options are a fairly safe bet and will make a lot more money than the stock in the same amount of time.