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American Capital Agency Corp. Message Board

  • headhunter80904 headhunter80904 May 22, 2012 5:08 PM Flag

    Put Premiums

    Anybody else notice what appears to be extra put premium in future divvy months (Sept. & Dec.)? I think this has entered after AGNC declared an early divvy in March, before option expiry, catching them off-guard (and making a few, like Ben9471, very happy). Previously, ex-div was always after opex, in the last week of the month. June put premiums indicate that the MMs think we're back to business as usual, at least for the next divvy, but they're playing it safe further out.

    Seems like there's some free money there, if you tend to believe, like I do, that the March early divvy was an anomaly, so AGNC could get an SPO out early to take advantage of some good paper available.

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    • << As to "I think, if anything, the MMs have already had a sit-down with management..." I wonder if it would be legal (or according to SEC rules) to have such an agreement that is not made public. I would think not, but I am not sure. >>

      I wasn't suggesting that they'd drawn up a legally binding agreement, just possibly a little chat in which the MMs said, "Hope you don't pull another March on us." To which AGNC replied, "Yeah, okay, sure. . . sorry about that, but we needed the eggs."

    • I agree headhunter, in fact I had originally written a couple more sentences suggesting that it would probably be the exchanges, on behalf of their MMs, who might do that, and explaining why I thought that, but the comment had gotten too long and I edited it down. In the end, we can interpret Doc's comment to refer to "the option powers that be" rather than to any specific actor.

      As to "I think, if anything, the MMs have already had a sit-down with management..." I wonder if it would be legal (or according to SEC rules) to have such an agreement that is not made public. I would think not, but I am not sure.

    • << As for "You'd think the OCC would have a sit down with management..." I completely agree. I can't imagine that a lot of people are not very annoyed with a company that has such huge dividends and picks its ex-div dates so close to op-ex dates, creating havoc with the conservative way MMs usually conduct their business. >>

      While this discussion has been especially enlightening, thanks to Doc and Ephort, I think I'd have to disagree here on the OCC having a sit down with management, because, as I understand it, the OCC's role is *only* to provide clearing services to the MMs/brokers and consequently their clients (option buyers/sellers). Thus, they don't play a regulatory function, beyond providing order to the option market by the services they provide.

      I think, if anything, the MMs have already had a sit-down with management, and gotten their promise that June ex-div will happen after June op-ex. And even then, they're still fudging their bets on the Sept. and Dec. divvies for now, waiting for management to follow through on the June promise.

      I also still think this "fudging" by the MMs provides an opportunity, selling those Sept. and Dec. puts, straight up (if you've got the margin), or in a combination or series of spreads. Still working out how I'll play this . . . :-)

    • Doc, there are many situations where a trader's position may experience a sudden, unexpected profit -- a merger, an invention or discovery, other similar events, or -- as in our case -- a change in ex-div dates. But these unexpected windfall profits cannot be described as arbitrage, IMO, because they are not guaranteed (and there is usually risk in the positions until such events happen).

      However, arbitrage is indeed possible in the markets. Institutional traders have software programs that will identify minute mis-pricing in different markets and execute arbitrage trades in microseconds, locking in a guaranteed profit. It happens in options as well, and big option trading houses have software that identify such opportunities.

      So the "no arbitrage rule" does not say that arbitrage is not possible or that it never happens. It only means that there cannot be a theoretical way of pricing something that makes arbitrage ALAWAYS available. If, for example, we didn't have the put/call parity relationship, it would be possible to easily do arbitrage with options every day. As it happens, deviations from this relationship do happen, but they are the exception, and you cannot count on them being available all the time.

      As for "You'd think the OCC would have a sit down with management..." I completely agree. I can't imagine that a lot of people are not very annoyed with a company that has such huge dividends and picks its ex-div dates so close to op-ex dates, creating havoc with the conservative way MMs usually conduct their business.

    • Ephort,

      To get more meat out of your excellent post re. the no-arbitrage rule. Isn't that what happened to those Mar Long Put holders last Q, though. They received a "risk less" arbitrage.

      Secondly, why can't anyone buy 100 shares of AGNC on Tuesday, for say 32.22, buy a protective 32 Put and Short a covered 32 Call , for a 12 cent credit, on the option hedge. Granted it is 10 cents unhedged, but I don't think that's what they meant.

      I know, the June Put does not contain the divi premium. Granted, and I know that was the n-Arb. Intent. But, if management does keep changing EX's especially Sept and Dec with their late OPEX dates , as you stated( management might do it unintentionally , as you said), well, there goes the no-Arbitrage rule, as the Long Put holders get their cake and divi's too.

      It seems like my short Dec 27's will be OK, but I sure don't want short ITM Puts going into, June, Sept or Dec. You'd think the OCC would have a sit down with management, if they change June, Sept, or Dec EX's to precede their OPEX dates.

      DocReits

    • Sorry about the inaccurate expression of my understanding which you eloquently re-edited for clarity.

      I did mean to say that the shares assigned were at the value of the strike price (35), but were currently valued at the closing underlying stock price of 32.22, from which you pointed out left you with the $2.78 cover. Given your total transaction, I'd refer to that amount as "tip" money, or "cover change!"

    • Is a duplicate of already posted message which was responded to. Sorry!

    • Excellent editing for brevity and clarity!! Thank you.

      Yes, the net credit should have been $1087 as you pointed out.

      It is amazing that this put short caught your attention in October and so few other people saw the potential.

      The bid/ask on the Jan 35 is large.
      You should get your wish for 7 should there be a surprise announcement of another SPO!. I am keeping my eyes on AGNC and LINE for these put trades (tho' I feel more comfortable with OTM put spreads with LINE and liking the greater profit potential for the ITM put spreads you described for AGNC - FYI, I am long on both stocks, with many more held shares with AGNC)

      (the duplicated post on the math was done due to the delay of Yahoo posting the original and my thinking it had gone into the ether)

    • >>So, you bought 100 AGNC shares per contract at 32.22 and the net credit you received was $1083. Is my math right?>>

      No, you always get assigned the Long shares at the strike price(35). This is the most common mistake when trading these.(The thought that you will be assigned the shares at the current PPS)

      The rest was pretty good, just phrase it this way to keep your head straight:

      "You were assigned shares at 35.00 and covered at current PPS(assuming you sold the shares)of 32.22. That cost you $2.78, netting 10.87(not 10.83), based upon your original credit of 13.65".

      Let everyone else multiply by their contracts. That's it. Well done!

      DocReits

    • And even if the underlying moves up after an early exercise, you can still profit from that move if you hold on to the assigned shares.

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