For the past few weeks, AGNC Call options (esp., 13Jan's) have been underpriced compared to similar AGNC Call options in quarters past (and even earlier this Q). Here's an example: The Ask price for 13Jan$34 Calls is $1.30 today on a closing AGNC price of $35.02. Now add the Ask price (the price you'd need to pay to buy at market, $1.30) to tthe strike price ($34) and you get a break-even price of $35.30 --- that's just a $0.28 premium to the closing price. A few weeks ago, that same Call premium was $0.78 ($1.45 Ask on a close of $34.53 on 14 Aug).
Perhaps that is due to the weak earnings reports for the last 2 Q's and MM are more cautious about AGNC going forward. And, a very few posters here have been talking up a dividend cut (highly unlikely). Still, we are approaching an announcement of that dividend and the typical run-up tp XD date (approx. 9/21 - 26).
All of this tells me to expect the run-up to XD date to be almost asymptotical (rather than straight-line) in the last few days before XD date (assuming that a $1.25 dividend is announced next week). What the high for this period will be is anybody's guess, but it will be well above $35 (even $37 or $38 is possible, just lower probability).
DISCLOSURE: I currently hold over 700 13Jan$34 AGNC Call contracts (100 shares each contract); have made an average profit of 37% (very conservative play) on past AGNC Call buys; and have followed AGNC daily since June 2008.
Yahoo is terrible. That is my preamble...
There is no reply button Steven, so I will reply to AL's original post. I agree with most of what you said regarding volatility definitions.
I specifically looked back on the ToS platform and even in the BATESAT years saw no correlation between being at the top of a range(28-30) and seeing IV falling as 30 approached.
""IV on the AGNC options does fall as the underlying approaches a cycle high. You're seeing it do that now""
Yes, volatility is falling compared to last month when we had the rapid gyrations(amount and acceleration) which caused IV to be higher then. This does not make your point, as we are in a "quieter" time now, which drives IV down.
""Mine is that the price action of the AGNC options near ex-dividend indicates they are not overvalued.""
Al is saying they are undervalued...
""Or are you saying that you will still be able to collect significant extrinsic time premium from the MM immediately before ex-dividend?""
I think one of us is confused. I always thought "collect" meant to short the options and "collect" the extrinsic time premium. Why would I want to do this if I believe the options under priced, No?
Al's point and my agreement is that the 13JanCalls are under priced, at present, not over priced, relative to a few weeks ago. My contention is that this is primarily due to decreased volatility from approximately 18% two weeks ago on the 13Jan34's cf to approx. 14.5% presently.
To AL...this change in IV, together with the 34 strike being more ITM, would seem to account for the premium difference. The two weeks time factor is a small factor on the 13Jan contract also. Further, the deeper the strike goes ITM, the higher the Delta, and the less extrinsic premium will result. I believe it is these few factors, AL, that is causing this seeming "value" discrepancy.
Best to you both and all AGNC Longs,
Sentiment: Strong Buy
"Al is saying they are undervalued..."
I know. I typed over when I meant under. Sorry.
Regarding collecting time premium - I believe Al is long calls right now, so he would be selling those options (collecting the premium) near XD. I guess I don't limit that term to simply going short the options, but I can see how that might be confusing.
My point is that those options likely will not have any extrinsic value when he sells. If you use the black sholes model and solve for IV, that means the IV will be low. The idea isn't so much that the 52 week high impacts IV as it is the cyclical high immediately prior to XD impacts IV. The MM's know paying over intrinsic value at that point is a losing proposition in the short term. They can't buy your calls and immediately exercise them without eating that premium.
I agree with your last paragraph regarding the impact of higher delta. I was trying, and apparently failing, to communicate that point earlier.
Either way, I believe I understand Al's point about the options being theoretically undervalued (caused, I believe, by the drop in IV relative to historical). I think he is correct, from his point of view. I just have a different point of view regarding how their value is defined.
Interesting discussion. I'm long 1940 Sept34's, so best of luck to all longs (myself included).
Its normal for the time value of the premium to fall as the option moves deeper ITM.
We're a few weeks out from XD and about 50 cents shy of the all time high. Common sense should tell you that the time value component of the premium will disappear (from the bid side) as those two items draw near. Why would anyone give you a large time premium for your options when we're so obviously close to a top in the cycle?
Good luck with your position, but its not really being "undervalued".
""Why would anyone give you a large time premium....when we're so obviously close to a top in the cycle""
That is one of the most peculiar statements I have ever heard anyone, as lucid as you seem, give, for option pricing.
Are you seriously stating that the MM's are looking at the historical range of a security to determine how much value to ascribe to a strike? Amazing! Better tell them to reduce the premium on those Sep680Calls on AAPL for 13.80. They must not have remembered that this is an all time high, and AAPL is at the top of its historical trading range.....;-)
Time value decay is minimal on 13Jan contracts because that is 4 1/2 months away. The example that I cited shows the undervalue of (far out) Calls today. That may not be the case for 12Sept Calls, where time value has decayed to near zero.
I own lots of Dec 32s and Jan 32s. These are 3-4 months away and only $3.00 ITM, yet the premium has gone to zero and even below zero on some recent days. For example, the last price today on the Jan 32s was 2.94 (which might have happened when the stock was a few cents below 35, but the highest bid price at the close when the PPS was 35.02, was only 2.95.
Am I going to have to take a haircut when I try to sell these in a couple weeks? Am I going to have to settle for less than par? Or will the Divvy announcement restore a few pennies of positive premium?
Sentiment: Strong Buy
Suppose the PPS is 35 then and the bid is 2.95 and you don't want to be clipped by a nickel. Suppose you want to sell 30 contracts. Short 3000 shares at 35.00(market), and ask your broker to exercise 30 of your Calls. You get the difference between the short shares and the strike price.
Rinse and repeat for each additional 30 contracts or however many...make sense?
Sentiment: Strong Buy