This is what I am thinking following Doc's work.
Sell, March, strike 31 puts for approximately $4.60.
There are 398 open interest contracts, 270 traded yesterday.
The potential point at which you are excercised is at approximately $26.40 ($31 - $4.60).
If the stock hits $29, you can buy them back for $3.30 and book a profit of $1.30 ($4.60 - $3.30), or
if you are exercised, you bought the stock for $31 that you will be able to sell for $29 (if that is the right price) for a $2.00 loss, but you received $4.60. You made $2.60 ($4.60 less a $2.00 loss), or
You can hold on to the shares and get the divdiend too, and/or sell covered calls on top.
My only comment on AGNC options is the low implied low volatility if you are sailing OTM.
I just feel like I am getting paid to click buttons, but so far this is my fourth or fifth sold put play and it is working on the MLPs. No need to buy calls or do anything else, just sit on the cash from the sale and enjoy the money that will be yours.
And yes, for all of you guys who are telling the losses could be huge (I get that, I really do). This is effectively a synthetic long with covered calls. So, same risks as owning the shares. I can argue that this bullish strategy is less risky the buying calls, but then there will be those that will tell me that I have unlimited losses, but so does the holder of the shares.
My only comment is that implied volatilty on the AGNC calls are low, so watch the OTM stuff.
Cool, but Fidelity charges you a lot less than TDA, the spread between the two is like 6%. I don't tend to stay on margin, in fact I usually roll 1/3 in cash so the rate isn't terribly important to me. I just couldn't resist Oct 4th and I marginned heavily that morning, took intraday 1.5x bagger profits that afternoon on 40 calls to end up slightly on margin and $6k richer from the intraday trade.
ephort, excellent. just bought some armh and covered with april 33s. i really think it is getting ripe for an acquisition. i agree with everything you said. i am going to wait and see how my line sold puts will develop, before having another hard think on agnc. As much as i would like to do something with agnc, common sense just tells me not to forward trade the micro economic issues in the mreit sector. mbb keeps rising, so the mbs yields are dropping while libor is moving up, meaning repo rates are probably up. Time to watch some paint dry elsewhere. Thanks for your views, you have diffently improved my knowledge of calls, as has doc and others.
Concur. Puts are overpriced, especially in light of the characteristics of the stock indicating that it is vastly more likely to go up than down from here.
I just hope you haven't flooded the market with your writes.
Ben, thanks for the tip. I put in some orders late today, but was not filled. I think you were using numbers that described the January puts not the March puts. Please let me know. I am trying to focus on whether the idea for the trade for these puts are right after the December dividend or are really right before the March dividend.
I am not trying to be picky, just trying to learn all I can.
I did mean March, but I think you need to read Ephort's post. Actually, I haven't done this trade yet, as it didn't get low enough for me. I am still thinking about it. I like the March puts, but you need to consider what ephort is saying, which I actually thinks works to our advantage. If the divdiend is cut, the puts will be cheaper to buy back. So, again this might be a very good trade to cover the dividend reduction, it it happens.
The only thing I don't like about this trade right now, as ephort says, is the low implied volatility on the puts. If they raise the vol., they puts will be more expensive to buy back.
All in all, it might be a good trade to put on before earnings, but perhaps best to wait.
I like the March puts in particularly because the open interest is low. I kind of like to know who might hit me with an exercise. As the price drops, the puts become more expensive, meaning that the only people that can exercise are those that bought at your price or less.
Ephort might correct me, but generally, this trade just works well. $31 - $4.70 = 26.70. We are good to hold the puts unless the price drops below $26.70, but as noted above not a big deal if we are.
31.00 AGNC120317P00031000 6.60 0.00 4.70 5.30 1 148
Consider selling put leaps. I sold Jan'13 $35 put premium $1350. So if the final AGNC price is $35 or more I keep $1350. If the price is $30 I pay $3500 and sell at $3000=loss $500. My profit $1350-500=$850 I do not lose money if the stock price is above $2150(3500-1350=2150) Plus I have the use of $1350 for year and half.The time premium is very high and as it drops to zero I can buy out any time when I have a profit. The big loss can be if AGNC goes out of business($2150)Ido not think so and can hopefully get out if the stock heads down badly.
A few questions on your deep ITM leap puts. If I sold puts My broker would reduce my funds available for trading (FAT) on margin as if I had already been assigned. Meaning the amount of money I could margin would be reduced by the amount it would cost for the shares were I assigned. If I sold 10 puts my ability to margin would be decreased by the daily price of 1000 AGNC shares. So rather than giving me the use of $1350 for a year and a half the effect is to tie up $27,680 that could have been productively traded or invested elsewhere. For example if SHTF some time during that year and a half and I wanted to be able to put numerous lowball limit orders in on numerous strikes and expirations hoping to get filled like I did recently on October 4th my ability to do that would be curtailed because I would hit my FAT limit $27k sooner than I would if I hadn't sold puts. Given that fact, I must compare the $27k I am tying up to the return I could get from shares over that time period. If I adjust your $21.50 breakeven for the dividends foregone had one owned shares I get $28.50 breakeven vs shares. Not a very compelling opportunity considering that I can buy shares right now for $27.68. Furthermore those shares would be margin-able so buying $27,680 worth of shares would only reduce my FAT by the ~$7k margin requirement. These differences margin requirements are why I favor buying calls over selling puts. With calls my FAT is only decreased by the amount I spent on the calls.
Do you have a different type of margin agreement with your broker than I do with mine such that you aren't tying up $27k by selling puts? I think Doc must have such an agreement, otherwise the complex options plays that he does wouldn't be worth tying up all that capital. Or perhaps his account is so big with so much margin capacity that tying up the money for shares is a non event for him.
Yes, as I have also written here more than once, selling AGNC leaps is a good trade for those who are patient and can delay gratification.
Such trades are protected from loss down to fairly low share price. Using current bids for Jan 13 put leaps, the breakeven share prices are:
Strike / Breakeven pps
40 / 23.10
35 / 22.70
30 / 21.50
25 / 19.80
20 / 17.70
Of course, the profit per share equivalent varies a lot among these.
Finally -- to repeat myself yet again: These put leaps are not fat because of implied volatility. Rather, it's because of the high dividend. Dividends are an input to option pricing formulas (including put/call parity) distinct from volatility (which is also an input). High implied volatility increases the prices of both puts and calls. High dividends increase the price of puts but DECREASE the price of calls. So, as Cain would say, it's apples and oranges.
As confirmation of the above, note that December puts are not more expensive than December calls (for strikes that are equidistant from current share price). This is because there are no dividends before their expiration. The call/put price asymmetry starts after December.
Disagree with one comment you made: "... there will be those that will tell me that I have unlimited losses, but so does the holder of the shares."
A holder of stock shares has LIMITED losses (max loss = stock price of $zero), not unlimited losses as you wrote.
It's a nit, but we need to be accurate for the sake of the novice investors.
A writer of Puts has the same limit on his losses as the holder of the shares (less the premium). Once the stock hits $0, the pain can't grow any further.
That's one of the reasons ROR makes more sense than ROI when gauging the quality of such trades.