Seems like every quarter before the earnings release we get a bunch of negative posts ahead of earnings, and the chicken littles are now in full force. There is nothing sinister here and agnc may well just knock the cover off the ball again. They beat the street and reported an increase in the interest spread, unlike many of it's peers. So, if you are long, you are probably not selling here, so we have a price drop caused by the anxiety ridden investors who lack faith and conviction. They probably don't know the stock that well, ane are dumping for fear (of what). So sell if you want, bash if you want, but the last quarter rise by .40 per share on the earnings release was good for me. If the report is not so good, then I will wait for a june payday. The only reason that this stock will suffer impairment will be a lower spread due to higher repo rates, which doesn't seem to be happening. Investors have given the merit sector plenty of cash to buy mbs at better yields to be financed with favourable repo rates. There may be some concern over rates on the long end, but bonds are doing okay, and at a yield that exceeds the 10 year treasury by a huge margin will remain attractive. So be patient and let's see. I also think a post without a recommendation is worthless and I question whether someone has skin in the game without a recommendation. Basically, the nervous nellies are here again to be silenced soon enough. So what, we are off by 1 per share.
Hmm. That does make a little more sense. And trying to just buy-write a bunch of shares and calls might not get the same thing, since anyone buying calls near the ex-div will be awake and paying attention and will be more likely to exercise, cutting that 500 short calls down to a few.
It's also a pretty brilliant excuse for the OCC to institute a policy of automatically repricing options according to dividends. Or charge an extra 5 mills per contract for sudden massive jumps in action. It's not like they're necessarily nice dudes; I noticed they bill a broker $75k for every exercise filed late on the expiration date.
"They're effectively buying 50000 shares and writing 500 calls. Only they're doing it the hard way"
The whole point of the arbitrage back and forth is to troll for those few sold calls which will not get exercised by the owners before the EX date. If they had simply written 500 deep ITM calls those calls would have been exercised before the EX date by the owners in order to collect the divi and the MM's would have had to use their long shares to cover them ,resulting in a wash for the MM's.
By trading literally 100,000's of options they hope for maybe 1% to not be exercised thereby collecting the divi on the long shares that don't have to be used to cover the non-exercised short calls AND are left with the short calls to both cover any loss on the long shares or be bought back at a depreciated cost.
It actually is pretty brilliant.
They have to pay fees to the OCC on that volume. Even if they're MM's.
But I still don't see the advantage. They're effectively buying 50000 shares and writing 500 calls. Only they're doing it the hard way.
"but I'm not sure they couldn't get the same result by just buying the number of shares they think they'll end up with after they exercise all the options. Buying options and then exercising them immediately is an expensive way to acquire stock."
Their expenses are nil because they are MM's. Secondly, they remain hedged with their short calls, so they get the additional kick of unloading the short calls after the PPS is discounted for the dividend, while retaining the long shares for any recovery.
I want some of that ;-)
Okay. I had some time (waiting for the dryer repairman this morning; such a glamorous life), and I happened across another page with the OCC's rules, and these are PDFs of the source material, not scans, so they're searchable.
I trolled through for "short", and still can't find any prohibition on identical short and long positions in the same retail account. In fact, I think they actually imply that they can cause it to happen.
Here's all the things I found that seem related:
OCC rule 611.
Is about the order in which long positions are taken down by assignments. Apparently it's so that the investor can designate which should be called-away or put-to first, to control the margin implications.
It doesn't say an investor can't have both short and long positions; it says his broker can't arbitrarily reorder the long positions for assignment, unless the long positions being reordered are paired in the same account with short positions.
It directly mentions spreads, so it may not apply to the non-spread situation where the strike and expiry are the same for a long and a short position.
OCC rule 614-h
This in fact creates a situation where both long and short options of the same strike and expiry will be in the same account.
It's in response to a liquidation of pledged securities, so it may not actually apply to options on common stock, but it might. Just a matter of working through the thousand words before the end of the paragraph where the statement "shall not close out such a long position but rather shall establish a short position" appears.
OCC by-laws Article VI section 13
Lists 8 different ways that a short position may be increased or decreased, but does not include a case where it is decreased by any opening purchase of the option.
Ibid. Section 16
Says that if you do a closing purchase for more than you have short, the excess is treated as an opening purchase and increases your long position. But it also says the transaction shouldn't have been booked by the broker because you didn't have a big enough position, so the thing about the excess only applies if it somehow crosses anyway.
OCC by-laws definitions
The definitions include Packaged Vertical Spread Options, which are a short and a long on an option with the same expiry; a strike-price spread is typical but but the definitions do not explicitly prohibit a spread of $0.
It's a cute strategy, but I'm not sure they couldn't get the same result by just buying the number of shares they think they'll end up with after they exercise all the options. Buying options and then exercising them immediately is an expensive way to acquire stock.
It seems all they're doing is screwing people who already have open interest in the call options, who were going to get screwed anyway by forgetting to exercise the options to collect a dividend. So they're really screwing the people who wrote those options.
And I see the rule reference, but that's the ISE (an exchange in Europe) stating off-hand a rule they believe the OCC (an American clearinghouse) has in place. Somewhere in the OCC's documentation must be a statement of that rule, and if it weren't for the cheeseball way the OCC puts their documents online it'd be a lot easier to find.
I think yourbestfriend.. pretty much answered your question about buying back the sold option.
On the other hand, if you do not buy it back and you reach expiration for your option and your "sold"(short) option is OTM(out of the money) the option dies, and you get to keep the entire amount your account was credited when you first sold it.
If your sold option is ITM(in the money), in the case of a sold(short) call with my brokerage(Fidelity), they will auto exercise the sold call and you will be "short" the equivalent amount of shares(# of option contracts x 100) at a debit from the strike price of the option to the current PPS.
So if you sold an AGNC 28call and expiration was today at today's price of 28.78 you would be holding 100 shares short at 28.00 or $78.00 in the hole/contract.
If you had sold a put the following applies. This time if at expiration your sold put is ITM you would see that you had purchased or you are 'long the shares' at the strike price of the option. So, if you sold a 29 put and today's price(28.73) was the price at expiration you would be 'long the shares' at 29.00 and be $27.00 in the hole/contract.
In both cases you still get to keep the entire original credit of your sold option.
Hope that helps!
Thanks, I learned something today. Although this practice is wide spread, it sounds sort of illegal and may border on secutity fraud in my opinion,but then so are the high speed computer trades that jump in front your limit orders and cause you lose money.What's legal in these markets?
OK..had to re-visit a white paper I posted last year. On page 9 at the top of page( second paragraph) you'll note that only Market Makers can hold an identical long and short option position overnight. Hope that helps...