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American Capital Agency Corp. Message Board

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  • return5x return5x Mar 2, 2012 2:50 PM Flag

    wow !!

    YBF - Regarding deep ITM calls...

    Are you suggesting that selling, for example, a Mar25 or Apr25 or Jun25 Call today will net you essentially the amount of the dividend (offset by any PPS appreciation on EX) by Monday because the option premium drops due to dividend?

    And that the risk of having that call assigned today and you having to pay out that dividend youself is low?

    If so, this is an interesting strategy. Seems too good to be true.

    Would the choice of expiry month be a factor in reducing the likelihood of assignment (i.e., farther out = less likely)? I see that the premiums for all months at 25 strike are essentially the same right now.


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    • Hey 5x,

      He's blowing smoke. If you were holding that 25Call long, why would you not exercise and get the dividend? Even if you thought the PPS would go down more than the dividend(1.25), what value would your 25 Call have then? You would at least have the dividend by exercising. OK, perhaps the holder does not have the cash to exercise, but those are few.

      Secondly if you thought the PPS would go up after EX, it would have to do so by the amount of the dividend(1.25) to equal exercising.

      No free lunch...otherwise everyone....;-)


      • 1 Reply to reits_r_us
      • Doc -

        Thanks. That is exactly why I said it seemed too good to be true - nothing is that easy. On the other hand, wouldn't your logic imply that every ITM call outstanding on DBEX would get exercised so all those holders would collect the dividend? We know that doesn't happen, right? So maybe there is at least SOME merit to this idea?


    • D'oh! No, you're right. The div strategy players are the ones pinning the premium to the deck, here. I keep forgetting about them. Good thing I didn't put in an order for that.

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