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American Capital Agency Corp. Message Board

  • stormfront2020 stormfront2020 Mar 21, 2012 8:12 AM Flag

    Dividends: Re-Invest Or Take The Cash ?

    I first bought on 3-22-11 & again on 10-27-11
    I'm up 4.52% on the stock, but I've taken all the dividends in cash.

    Just curious what the rest of you are doing.


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    • ink wells... hehehe... gee Doc, you sure look good for your real age then!

      Hoping the market turns today - EPD's going in the wrong direction at the moment, and picked up more VNR puts as the premium went up while the PPS dipped. Following Ben's KMP call play to see how it pans out & learn from it, feeling calm about AGNC, and LINE seems to be doing exactly what I want it to do at the moment, so all in all, if things play out well I just may invest in a solar pool heating system yet... wouldn't that be sweet eh?

    • YBF,

      >>Any scenario where you might be assigned is a scenario you don't want.>>

      Keeping it simple. You short the 13Jan30Put for 4.00, That is a credit to your account. For some seemingly irrational reason you are assigned with the PPS at today's price of 29.30 and are Long AGNC at 30.

      You sell the shares at market(29.30) and lose .70(30-29.30), but , this is important, you get to keep the 4.00. So your net profit is 4.00 -.70 = 3.30.

      This is important, so listen carefully, the Put is worth zero if I were to buy it back today as the bid is 3.70 and you might get 4.00 for it, leaving you with zero.

      So please explain how this assignment was deleterious to me?? Especially , in light of your statement that "Any scenario where you might be don't want"

      I want to be assigned and make 3.30. Don't you??


    • >>But if put prices rose more than call prices for supply/demand reasons (and beyond the dividend), you and I could synthetically arbitrage by shorting the (fat) puts, buying the calls, and shorting the shares.>>

      This is called a "collar" and I have been tempted at times to place this trade. Unfortunately, as you suggested , the MM's keep parity at zero, which takes advantage away from this position most times.

      It is a sweet trade if the Puts are fat, because you get to keep the fat, after the Calls are purchased. The short shares protecting the downside, with the Long Calls protecting upside against the short shares. This is basically what the MM's do to remain neutral.


    • Sorry -- correction. The institutional traders have to hedge their short puts with short shares (not their long ones). But this does not change the argument -- that sets the price of the puts for everyone.

      The arbitrage explanation (#2) is more straightforward. As in math, all roads lead to Rome.

    • "Put buyers are willing to bid the price of the Put up until their predictable profit is nearly zero. Call buyers expect a discount. "

      Unfortunately, no. The prices of puts and calls are inexorably coupled via the iron law of put/call parity. Their prices cannot vary independently in response to supply/demand without different kinds of arbitrage (in synthetic positions) becoming available. And I think you know about synthetic positions.

      There are only two fudge factors involved: implied volatility (which will normally be the same for calls and puts at the same strike and expiration) and the bid/ask spread, which market makers are under a lot of pressure (from the exchanges) to keep low, for liquid contracts anyway.

      But if put prices rose more than call prices for supply/demand reasons (and beyond the dividend), you and I could synthetically arbitrage by shorting the (fat) puts, buying the calls, and shorting the shares. If the puts are more expensive than what the (theoretical) dividend and time value amounts dictate, that would be easy money. They won't give it to us.

    • yourbestfriendintheworld yourbestfriendintheworld Mar 29, 2012 12:58 PM Flag

      It's simpler than that:

      3. Buy Put before dividend; wait for dividend; stock moves down by dividend; sell Put.

      Put buyers are willing to bid the price of the Put up until their predictable profit is nearly zero.

      Call buyers expect a discount.

    • There is another aspect of this:

      Why do the put prices incorporate (a big portion of) dividends to expiration? I have talked about this many times before, but here goes again.

      There are two independent explanations:

      1. Because your counter-party (the buyer of the puts) will in general be an institution (MM or other) that trades in options without taking direction bets. These guys hedge every position to the nth degree -- they make money from delta-neutral trading. To hedge the puts they buy from you and me, they have to short the equivalent number of shares (times delta, approximately). To hold these short shares, they have to pay the dividend. So the dividend is their cost of hedging the puts they bought. And they have to charge for it, by adding it to the price of the puts.

      2. Also, if the put price did not contain the dividends, then one could arbitrage by buying dividend-paying shares and hedging them with cheap protective puts. But markets abhor arbitrage, so of course there are no gold nuggets to just pick off the ground.

      Implicit in all this is the fact (I mentioned earlier) that your counter-party is not, in general, making a direction bet in holding the puts. That's why their exercising has nothing to do with their expectation of future PPS move. (And nobody knows PPS future moves anyway).

    • For the AGNC Jan 13 strike 30 puts, the calculator shows:

      PPS=29.30 time value=3.76
      PPS=20.00 time value=3.69

      So yes, it goes down a little, but very little. The reason the percentage variation here is less than for Apple is that here "time value" is not really time value. (Yes, that's what I said). It's hidden dividends, which Apple doesn't pay (yet) (and, when it starts paying them, they will be much less as a percentage of PPS than in AGNC's case).

      This, by the way, is the allure of AGNC put leaps: they give you the dividend through the back door, and as capital gains.

      But it doesn't really matter how much the "time value" (option price minus intrinsic) varies. As long as it is non-zero, an assignment erases it instantly and therefore offers an advantage to the short put holder vis-a-vis continuing to be short the puts. This is hard math, like 1+1=2.

      BTW -- funny you would mention Apple Jan 13 puts -- I have shorted some of those as well (strike 550).

    • yourbestfriendintheworld yourbestfriendintheworld Mar 29, 2012 12:00 PM Flag

      Yahoo's help on formatting is greatly appreciated
      (sarcasm off)

    • yourbestfriendintheworld yourbestfriendintheworld Mar 29, 2012 11:58 AM Flag

      >Admit this error,

      The only error is my believing you would understand the term "hypothetical".

      Actually, that can't be an error, since I was talking to ephort, since I expect cognitive dissonance from you and have asked Yahoo not to make me suffer it any more.

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