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American Capital Agency Corp. Message Board

  • jing_sun01 jing_sun01 Jan 8, 2011 3:32 PM Flag

    How I Play AGNC To Get 40% Return

    I got into AGNC in early Sep. last year when I did a refinance of my home. I was forced to take out $100,000 more money in order to lower my rate from 3.75% down to 3.15%. So I did some research trying to find a place where I could park those extra money yet getting better return than that 3.15%. At the time I had EAD in my portfolio, which pays about 10% annually return, so I originally planed to dump all those $100,000 into EAD, thinking that I would pocket 6.85% extra after paying 3.15% mortgage interest. Then luckily I found AGNC, which had been consistently paying $1.40/sh qtrly divvy, or about 20% yearly return for more than a year . After several days worth of DD, I determined that since Fed will keep the short term rate at close to 0% for at least another year, the spread that AGNC uses to make money will be stable for the same period, thus to pretty much guarantee that $1.40 dyvvy is gonna be safe for the timebeing, so I decided to open a margin account and put all this $100K in, and bought $3650shs at about $29 (very close to ED at the time, thus a fairly high price). Then, together with the XD came the secondary offer, which lowered AGNC down to $26 from over $28.50. It was a shocker to me at the time, but I ended up margin it out and bought 3000sh more. To my surprise, less than 3 weeks later, AGNC had gone all the way back up to pre-secondary level, and I happily sold out the 3000sh margined shares, pocketed $6,0000, which was more than the $1.40/sh of 3650 would give me. After that, we all had gone through another secondary in Dec., which took AGNC down from $29.60 to $28. This time I doubled down my shares again with the full margin capability. It was really a pleasant shocker to me to see AGNC fully recovered secondary share loss in just 3 days this time! I happily sold off my margin shares with about $1.50/sh profit.

    So, based on the above simple fact, we get $1.40/sh divvy almost for granted each qtr, and we get one secondary almost for granted in each qtr as well. If you do the same as I do, you will get 2 chances each qtr to earn $1.40/sh, thus doubling your return to roughly 40% in a year. Not too shabby, huh? And, it’s not that complicated to do either. All you need to do, is to long AGNC at all time, and double down your shares whenever they do a secondary. You don’t have to buy/sell options, timing and guessing the trades around earning release or x-d, etc. yet you make 40% return almost for granted! Simple as that, right?

    GLTA.

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    • Yeah Olee, me too. The stock did reach pretty close to its near low 5 days post X-d., but the upward move from there has been remarkable. I've been on the sidelines watching it go up, up, and away. Now, I'm looking forward to a secondary. If it happens next month, have your laptop on the beach (your new office) with you in SD, just in case.

      Cheers

    • Thanks for the explanation!

    • yourbestfriendintheworld yourbestfriendintheworld Jan 10, 2011 7:08 PM Flag

      Sorry. I short-armed the math. It's a 28% price drop (2/7ths exactly), not 33%, to go from 50% to 30% margin.

      Been a while since I bothered to figure that out. I haven't seen a margin call since 2000.

    • yourbestfriendintheworld yourbestfriendintheworld Jan 10, 2011 6:58 PM Flag

      The risk of a margin call depends on the leverage on margin and the volatility of your account (not of a particular item in your account; usually every equity in your account counts as margin; it depends on the brokerage's assessment of the likelihood that the equity will tank, especially if it's an illiquid or penny stock where the volatility can go sky-high if a squirrel farts in the park).

      So you can use quality equities as margin to borrow to buy volatile equity, even if the equity you buy isn't marginable.

      When you buy, generally you have to have at least 50% margin, but after that you only have to maintain 30% margin. If the volatile equity is only a small part of your portfolio, you'll start well above 50% and stay well above 30%.

      Putting every dime you have, and doubling-up on margin, into something that's likely to drop 33% in a day is not wise. And as I said your broker will probably be on top of that and not allow you to use the first tranch as margin for the second.

    • yourbestfriendintheworld yourbestfriendintheworld Jan 10, 2011 6:49 PM Flag

      Go look at the example you referenced again.

      See the "/360" in each rate term? They divide the annualized rate by 360 (not 365 for whatever reason) turning it into daily rate.

    • Thanks guys for the kind suggestion to implement a stop. I OF COURSE use a stop. In fact, as my profit grows, I can lower my stop a bit more. At this time, with about 20% profit already in pocket with just 5 months of time, I set the stop at $27.50. If for some reason (other than SPO) AGNC goes down to that level, I will sell all my shares without hesitation, and still keep about 10% profit in my pocket.

      Investing always has risk. No question about it. You always have those situations like 9/11 in the back, that's why I DO NOT buy shares with margin regularly, only to use it for SPO, knowing that I can reach my recovery target VERY shortly. I consider this as the best, smartest and safest way to use margin. What else can you tell me is a better approach to use margin?

      As for using the mortgage to buy stock, please re-read my second post, and you'd know that this $100k is just a small % of my holdings, and I can afford to lose all of them without affecting anything in my life. So thanks for the concern and advice. I appreciate it.

      Just to let you know, my biggest investment holding is Citi group, in whitch I have over half million equity. A safe holding, right? I won't touch these shares until they hit $20 a share, and I expect this target to be hit within 3 ~ 5 years.

      Good luck trading! AGNC certainly looks good, itsn't it!!!

    • Thanks Ddjim. It does look like a good deal for a margin account. It seems that to reduce the risk of a margin call, you would need about 10-20% of your money in cash. I need to do more research in this area.

      I've been fortunate to have found AGNC. I'm still shaking my head because I missed out on the great run-up after the ex-div. I would have never imagined 29.60. I'm going to have to work hard this month to maintain a good return.

    • Hey Olee,

      I hope that you are staying warm; I know that you are ready for SD in Feb. I took a look at the example you referenced re: margin costs from the low cost broker that Quad uses. It looks like the rate is annualized by virtue of the "360" in the equation's denominator. While margin may not be appropriate for your current circumstances, should you elect to use margin in the future, this looks like a good deal. I'm very impressed with how you are currently able to leverage $1,000 in interest charges to make 12,000/year. Keep up the excellent returns.

      Cheers

    • reits -

      Ok - thanks for the clarification. I never meant to dis your strategy - sorry if it came over that way.

      I look forward to constructive exchanges with you.

      Quad

    • Quad,

      You write,

      "Apparently you're not a fan of precision.Any option at any price, ATM, OTM or anywhere else, without time premium will be immune from time decay."

      My point was that the option that starts out with no time premium CAN develop time premium during the contract cycle and then lose it towards expiration. Obviously if it doesn't gain something it did not have it couldn't lose it. Here is an example:

      The price for AGNC on 02/08/2010 @ 27.22. Mar25call @ 2.50(Theta 28 cents).

      On 02/17/2010 close @ 24.94. Mar25Call @ .80 for 25.80 trading(Theta 86 cents).

      At expiration on 3/19/2010 PPS @27.80 Mar25call @ 2.80(Theta zero)

      28 to 86 to zero.

      My point is and was that Theta can change as the PPS changes especially as the PPS moves away from and toward the strike.

      Finally,

      "On the distant substantive issue of the post - you failed to address the issue of forgone dividends as surrogate time decay"

      The above example was between dividends. This is how this "convoluted" option trader plays this stock.

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AGNC
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