I sold deep in the money calls and they have declined in value exactly the same amount as the stock price. If the stock price gets too close to my call strike I will just buy them back and sell deeper. There is protection for the down side if you take precautions. You can cancel out all this volatility by selling deep in the money calls.
It also helps to own some SKF these days. That's a 2X short financials. One does need a good hedge strategy these days. Either that or just get out because it's too risky to not be suitably hedged when the ^VIX is 45. This is madness.
i use a different hedge that works better.. when AGNC was 28.00 I sold the 29 calls and bought the 27 puts.. net cost was .10 If AGNC craters like it has I lose only $1.... if AGNC returns to what I consider fair value I make money. I consider fair value around 29
I am not sure what you mean by "if they close over $27.4 he is in implied negative territory." If share price does not go under 23, seems to me he is guaranteed his 40 cents no matter what (and yes, his shares will be called away in that case unless he closes his calls early). If share price goes to -- say -- 30 and he closes his calls then, he pays about $7 for the calls, but he got $4.40 for them, and his shares are now up $3 -- again, plus 40 cents (excluding trade slippage).
As for "2.5x" -- that was a reply to slcehamrick who had said "If this goes to $22 he'll find out how hedged he is to the tune of losing 5x what he collected in premium." (My point was that at 22 he would lose $1 from the shares, which is 2.5x the 40 cents premium, not 5x.)
[It's not easy to determine what comment another comment is a reply to. I assume that caused some confusion here.]
Been considering an investment in AGNC, especially at this or a lower price, but have a few questions. Have reviewed the board for almost a month and there are several great posters here.
- Many seem concerned about the SEC inquiry - first, i assume that the FED is now doing exactly what these MREITS are doing. Do the MREITS provide a support to the housing market by providing a place in which to sell the mortgages ? What would happen if these MREITS were to disappear for tax reasons ? Wouldn't it be in the governments best interest to expand this market so there is more competition for these mortgages ? I assume if the MREITS go away, then the bank and government have to pick up the what the MREITS were purchasing - seems like a negative to the FED's Operation Twist policy ? Is is really in the goveernments best interest to get rid of this MREITS with the housing market in such dire straights ?
- the tighting of the interest rate curve. Do many see this as a long term issue or is this something that may last 6 or 9 months at most ? I assume in the short term this is a big negative to the MREITS, but is short term 1, 2 or 3 quarters ? Do any of you expect the MREITS, especially AGNC, to fold up do this tightening of the curve ? Or will they adjust to the new interest rate enviroment, make the best of it for several months and then return to normal business once the FED ends this strange stimulus ? Has the management of AGNC shown an ability to handle this type of situations in the past ?
- Operation Twist seems to be having the biggest impact on the stock price right now (not counting the overall market conditions). Do many think that the FED will actually accomplish it's goal of reducing mid to long rates ? If these rates even move slightly, wouldn't there be a flood of corporate bonds hitting the market to take advantage of any decline ? Wouldn't this then have the opposite effect - supply would outstreach demand and rates would rise ?
With the price seeming to head toward the low 26's or even into the 25's, this may be a good time for a long term investment if these MREITS can survive th short term. Can they survive to live to fight another day ?
Also, i have seen a lot of discussion about staying away from this stock until the earning annoucement and discussion - does anyone expect that they would announce a dividend reduction at that time or is that something that would happen in early Dec ? Has the past earnings calls provided any insight into the next dividend ? From my reading, there seemed to be a lot of concern for the Sept dividend even after the earnings call until the dividend was declared. It appears the earnings call is either viewed as neutral if EPS is reasonably close to the $1.40 or negative if it is significantly lower ? Has management ever provide dividend projections at these calls ?
Good to see we are on the same page with regards the calls. I really don't understand the reference to making 2.5x under $23. Can you explain?
So his strategy is to make the 40 cent premium if they expire at $23 plus. If they expired right now at the close, he would lose the share for $23, paid $27, net -$4 but offset $4.4 premium, nets 40 cents. But if they close over $27.4 he is in implied negative territory. I wonder why bother?
With regards being long yourself, nothing wrong with keeping the powder dry. Who knows where this market could take us. I am now waiting for the bounce to lighten my load.
Good to hear your bullish sentiment, Terr, as your earlier pessimism had an effect on me (as did the sentiment of Olee, Ben, and others). I too have some (cheap) calls, though only a few at this point, at 27. I am monitoring this board as I am trying to decide when (and whether) to make a bigger move.
I did understand that those were 23 calls. As I said in an earlier comment, I assumed the fellow did not mind having his shares called away. Rather than selling them outright at 27, he can now get 27.40 at expiration -- and has the option of closing the calls at a smaller profit if the price turns around around. I really don't see what's wrong with that.
Couple of things:
1) with regards this thread I suspect you think that the poster has sold $23 puts; in fact he has sold calls, so a share price sub $23 will be the best scenario for not having the shares called away and pocketing the premium. Anything higher than $23 will likely be called away.
2) Yes, I was waiting for significant shoes to drop, but I found recent pricing too attractive and started to build a position of $24 calls as the share price headed toward $27. I have averaged the position down as we slide to $25.88, making the last buys at $2.85.
I am not interested in the dividend, as I always sell the call contracts and pocket considerably more than the dividend yield (hopefully). I posted my rational in response to reits Option 8.
I may well be premature, but it seems to me that current prices cover a lower earnings/dividend announcement quite well. SEC is a different animal, but can't see much on that for some time in the future.
If I understand you correctly, you are recommending going long the shares right now (taking "the opportunity of the weak PPS"), with no hedge, for the purpose of collecting the December dividend. Are you doing that yourself?
I thought you wrote a few posts recently recommending staying out. Do you think the pps has bottomed and it's time to get back in?
His Decembers expire very close to exdiv, likely they will be ITM and called away at $23. Sure he pockets 40 cents but the dividend loss is greater value. He is best to take the opportunity of the weak PPS, take the profit and exit the call position now, IMO.
good for you. I bought a put for each block of AGNC I got this time and would have done just fine had I not tried to buy some more and sold them instead. I call it "being really stupid". well, the ones I kept are doing fine.
try TVIX (2x the daily performance of the S&P 500 VIX Short-Term Futures index). 60 days ago it traded around 19, and today it closed over 100. It was a steal at 19 because there was little downside risk compared to all the troubles with Europe and our own market.
Hedging is critical, and if you do it right, you stand to make a lot more money in the down-market without unloading your losing positions.
With the market collapsing, you can actually sit back, relax, and cheer the blood flow.
I don't see your strategy as a hedge. Buying the vix may be a hedge, yes, but selling calls, not really. I sell many covered calls as an income generation strategy, and a covered call can lower my CPS if it expires worthless, but I wouldn't try it on AGNC, and especially not deep in the money. It acts like a wound up elastic, and will rebound to $28 or there abouts. At that price your call has become a liability.
Interesting, my strategy is long without owning the underlying, and I buy deep in the money calls.