Hey guys, I like the 90/10 hedging strategy, looks like it saved you today Engie.
I bought the Nov31 calls today at the dip at $1.40, if I want to implement this hedging strategy, would I basically buy an equal amount of puts at $1 lower strike, (Nov30 puts)? They are currently going for $.46.
Also, how concerned are you guys with a SPO in the near future?
Oh, I forgot to add, I don't expect an SPO until after earnings. I'd be very surprised if it was before.
They probably want to make their book value public before an SPO, especially if it's gone up a good amount as expected. Announce a rise in BV, watch price go up, SPO!
One more point of information, last year they executed an SPO immediately after earnings in October.
10/25/11 American Capital Agency Reports $1.39 Earnings and $26.90 Net Book Value Per Share
10/26/11 American Capital Agency Announces Public Offering of Common Stock
Angrad can offer a more experienced take, but I'll offer my own thoughts and see what he says.
The 90/10 ratio is the $$ invested, not number of contracts. So, if you invest $900 in calls, invest $100 in puts. The call/put contract ratio will vary depending on $/contract and which strikes you buy. Let's say you bought 10 Nov.31 calls for $1.40, which would be $1400. The hedge would be about $155.
It looks like you could either
1. Buy 5 Nov.29 puts for 5*100*$0.33 = $165. But that's 3 strikes away from the current price.
2. Buy a few cheap Oct.31 puts ($0.15) to protect against another big drop this week, then buy Nov puts after October OPEX. If the PPS goes down a lot over the next couple of days, the Nov puts will get more expensive but you might make money on the Oct puts. Keep in mind that the extrinsic on the Oct puts will run out fast since we're 4 days away from OPEX.
If the PPS goes up, well, that's what you want for your calls, and the Nov puts get cheaper.
The difference between your options and my trade is time left until OPEX. My trade worked well because I entered it with less than 2 weeks to go until OPEX. That's why the extrinsics were low and I could buy the puts for very cheap. With the volatility on AGNC Nov puts, you'll be paying a good amount because there's over a month of time value until Nov OPEX.
Hmm, not sure what I would do. What is your plan for unloading the calls? Do you have a target price, a target date, or are you playing it by ear?