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American Capital Agency Corp. Message Board

  • reits_r_us reits_r_us Dec 3, 2011 2:02 PM Flag

    Test EVEP

    Yahoo is blocking a long post I am presenting re the synthetic long stock position. We'll see if I can present it in pieces...

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    • Pretty crazy Gary,

      >>I ended up losing about $250,000.>>

      I know exactly how your gut felt that day...your example is a good reminder to all about the potential risk(loss) in writing naked options.

      Good luck!

    • Hi Doc;
      I think I'll have to follow your latest suggestion. Today, I'm trying to sell some EVEP Mar 85 Calls and I can't sell them .05 above the buy price!

      Yes, last year I got caught selling ITM Puts on Apple. That day, AAPL didn't do it's relentless up move and I ended up losing about $250,000. One day!! Only good thing was I only lost all of my hard earned AAPL option profits for the previous year. I didn't lose my retirement principal.

      I appreciate your free advice and I'll contact you if I manage to make any profits on your EVEP option ideas.

      Go Niners;
      Gary

    • Hi Gary,

      Congrats Niners!

      I wish I had a 1% commission for all the recent poster's remarks about the hundreds of thousands they've made off of my suggestions...;-)

      I am very cautious about advice to others especially with long time hold trades. I like as little time exposure as possible to market volatility, especially in these crazy volatile times.

      The surgical cuts that Ben and Terr are famous for come to mind. I am tempted to trade EVEP right now because of its recent decline. Ben and Jim have pointed out the dip that many MLP's have taken during the Dec 17th time frame. I have only seen this for the past two years.

      I have seen EVEP increase substantially one month out from EX for the past 11 Q's, and particularly the last 6 trading days to EX. So I will tell you what I plan on doing and let it go at that.

      On the last trading day of this year I would like to buy the next deeper ITM strike from the closing PPS that day for the Mar contract(which includes the EX).

      So if the PPS is at 67 buy the Mar65Call and sell the Mar65Put. This is called a Synthetic Long Stock trade. You can usually capture close to a one to one movement on the PPS on this trade. This(1/1) happened on May EX( for 4 points) and 1/1 on Aug EX for a 15 point move(whoopee) and moved 7/10 on the Nov EX.

      So in hopes you don't drool on your keyboard that was a gain of 4 + 15 + 7 or 26 points for just the past three Q's. Your average cost to put on this spread is 4.00/spread or $400 + commission and margin interest.

      Put on 50 spreads for $20,000 investment each Q. You would have made 50 x 26 x 100shares/contract or $150,000 in a total 3 month window since Mar 31st this year.

      Disclaimer:

      Keep in mind that whenever you trade naked options(Puts in this case), you also have potential losses all the way down to the PPS reaching zero. Multiply the strike x 100 x # of contracts to determine this number. It is not pretty.

      On the above 65Put example if the PPS went to zero without intervention on your part , you would owe 65 x 100(shares/contract) x 50contracts = $325,000. Not bad because that is all you can lose.With naked Calls the losses are unlimited.

      I Lost so much money in the 1997 run away stock market when I was selling naked Calls and Puts on the SPY I lost everything including having to take out a line of credit on my home. If the world is ending either buy back your Puts or short the corresponding # of shares that are contained in your Put contracts. Watch out for whipsaw.

      Writing(shorting) options should not be done by any until they have gained experience going Long(Buying Puts and Calls) with naked options.

      When you become filthy rich remember your poor ole mentor DocReits...who still licks his wounds every now and then...;-)

    • Hello again Doc Reit:
      After studying your post for awhile, I think I got it. Since you expect history to repeat itself with another price rise before EX, buy the Mar 65 Calls now (while they're cheap). Then wait until Feb before EX (when prices have risen) and sell whatever option looks good at the time x 100. Brilliant. Obvious now, but not to me last night! My post last night was to buy Mar 65 Calls x 10 because that was BE with the Options I would have sold. Based on your experience/research, how many Mar 65 Call options would you buy at this time (since I'm NOT selling 100 Options now, I have to come up with the money and risk is that prices won't rise by Ex date).
      Again, thanks for taking the time to answer these novice questions of mine and I won't be cussing you out if things don't work out like you/I hope they will.

      Niners clinched a playoff spot, so today has been a great day. Gary

    • Peter,

      I think we'll touch 29(28.99) sometime this week baring the end of the world. Count on massive resistance at 29.

      Reits

    • BTW Gary,

      If your shares had been called in my example of the Nov75Call for 4.00 bid on EX day, you would have had your shares called @ 75 and lost the 1.70 difference in closing PPS, lost the distribution of 76 cents for a total loss of 2.46, but would have gotten your 4.00 for a net 1.56 gain(twice the distribution) and not have suffered the PPS going down to its present state.

      More painful..You could have picked up more shares at the Thanksgiving (literally) swoon for 63.00 and be in a pretty sweet position to repeat right now.

      Hindsight is wonderful isn't it?

    • Hi Gary,

      I am going to be a contrarian here because I think the CC plan is premature. I know there are probably hundreds out there in our hearing that do exactly what you are considering each Q and have done quite well.

      Here, IMO, is a way to make more money using much less exposure time and guaranteeing(90%) your shares not being called at EX.

      I am assuming for this example that EVEP will have its typical stellar rise to EX this Q. The PPS must rise for this to work or else your plan is better(more profitable). The only reason my interest is so piqued by EVEP is for this incredible march to EX we have seen of late, so as my dear daddy used to say , "Strike while the iron is hot", and it sure is right now!

      Last Q on Oct 3rd, one month out to EX the PPS was similar to now , trading @ 65.76. The Nov80Call was bid .85.

      As the PPS rose to EX the PPS was 76.70 on Nov 2nd, one day B4 EX. That Nov80Call was 1.70 bid, double.

      My point, on a rapidly rising runner to EX it is self defeating to sell your CC early....wait until the very last day B4 EX and then sell as low a strike + premium as possible to get you a tempting* amount over closing price to not have your shares called.

      Last Nov 2nd that would have been the Nov75Call @ 4.00 bid(79 BE cf to 76.70 PPS close) It expired worthless in a couple weeks.

      This(4.00), + the distribution also offset the beating(not completely)that the PPS took after EX.

      *tempting..DocReits definition: 3+% over closing PPS on day B4 EX.

      Soooo..I would go for your Long Calls and wait for the Short CC on this particular stock...but hey EVEP might be at 65 on Feb 2nd, but I think we can both bet about 99% against that..;-)

      Good luck Gary,

      DocReits

    • Hi there (dont know your name),
      Either one will do it for me but I think there is going to be another pull back to $65.00 or less and I will wait couple of weeks for that. Look at the futures looks like a good Monday.

    • Hi Peter,

      Only drawback to Jan contract is that it leaves you a couple weeks short of EX in Feb. Might want to do Mar60Calls's instead for same BE(70.70). That way you can run up to EX in Feb.and unload on day B4 EX.

      Last few days B4 EX have been pretty fantastic on last two Q runs.The last 6 trading days have seen over 5.00 runs! Makes me want to be patient..;-)

    • Another play for the ones with the money: buy Jan 65calls for $5.50,if it doesnt get where you want it, call your option and sell pre ex date.
      With 50 contracts you may profit $40-50 thousand.

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