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American Capital Agency Corp. Message Board

  • igsteri igsteri Oct 25, 2012 4:22 PM Flag

    OT: Doc question about WMC short puts

    Hi Doc,

    I see you are doing some maneuvering with your WMC short puts.

    I shorted a few of the 13Jan22.50 @$1.60 at the time of their offering. WMC has been declining since and it appears you are doing some sort of lenloc's recycling, right?

    Could you explain how you recycled your puts and what I could do in my situation if WMC keeps declining. This is the first time for me shorting puts that's why I did just a few, but would like to learn how to rescue/improve this particular trade.

    Thank you and good luck with your trades,

    Igster

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    • Hey Igster,

      What sbrown said is good advice if you have a stock with a very tight bid / ask spread. WMC is not that stock. Whenever you short puts you ultimately have to ask yourself whether you would be good at owning the shares at the strike minus your credit. You and I have about the same BE. I am presently at 1.50 credit on the 13Jan22.50s, meaning I would own the shares at 21.00. That is a great price IMO.

      In fact it fits in perfectly with my wanting to own good stocks with 16% yield in 2013. At 21.00 PPS it trades just over 16%. So does NYMT. I will wait until closer to OPEX, or I am assigned, before I change anything.

      Who thought we could own these mReits at yields of 16% +. I am a buyer of NYMT, ARR, and WMC. I will wait for earnings on AGNC. I think no matter what the earnings, the PPS might tank. 31.00 or lower would be the price to buy. That will give us 16% on AGNC, going forward.

      Regards,

      DocReits

      Btw, if you roll down(to the 20's) now, you lose the leverage that a zero spread offers at OPEX in Jan. on the short leg. IOW, suppose we are at 20.00 in Jan. The 22.50s are worth 2.50, so we are down 1.00. Buy back the 22.50's and roll out to Apr or June, to the same 22.50s for 3.50. Net credit +1.50, minus 2.50, + 3.50 = + 1.50. Nothing has changed except you have more time now for recovery of the PPS. Of course, if the PPS keeps going down you eventually lose, but so does everyone else who owns the shares, and eventually we all die in a nuclear cloud. But I am slightly more optimistic about WMC, and IMO, so are the directors at Legg Mason....;-)

      • 2 Replies to reits_r_us
      • """Btw, if you roll down(to the 20's) now, you lose the leverage that a zero spread offers at OPEX in Jan. on the short leg. IOW, suppose we are at 20.00 in Jan. The 22.50s are worth 2.50, so we are down 1.00. Buy back the 22.50's and roll out to Apr or June, to the same 22.50s for 3.50. Net credit +1.50, minus 2.50, + 3.50 = + 1.50."""

        Doc, I just re-read your post and found your numbers confusing, I thing it should be:

        Net credit from first trade is +1.50 , minus 2.50, +3.50 = + 2.5, right? or am I missing something to the equation?

        Igster

      • Hi Doc,

        Thanks for your reply.

        Well, this is what I did today (probably unnecessary):
        I bought back the 10 13Jan22.50 puts @2.80 (sold them for $1.60 prior) thus locking $1,200 loss on the trade. Then I Re-sold 10 13Apr20 puts for $1.85 and collected $1,850 premium.

        According to my calculations that lowered my profit on the trade to $650 if they expire worthless in April. ($2,800-$1,600=$1,200loss) so $1,850-$1,200=$650collected from this WMC trade and my BE is now $19.35 (I think :)

        I wasn't optimistic that we'd be definitely over $22.50 in Jan, that's why I went with a lower strike and further month.

        What do you think about my first "Recycling" :) ?

        Best,
        Igster

    • o You could do nothing & be assigned the shares if the price falls below the strike price. If assigned, you could sell calls against your long stock to try to recover any losses from your original position.
      o You could buy back your puts and take a loss
      o You could buy back your puts and re-sell lower strike puts, or roll them out to a another month at the same or different strike

      As a suggestion, I would not sell naked puts. You never can tell what will happen, and with naked puts you are exposed to losses down to the point where the stock is worthless. Instead, use put credit spreads. With put credit spreads, your potential return will be slightly less, but your downside potential loss will be limited. A lot of people will tell you that you don't have to buy protective puts below your short puts, but they are foolish, If we happen to have some terrible event, like a financial meltdown or terrorist event, you will find it extremely difficult if not impossible to get an order through to exit your position. Selling a put spread with protective long puts is cheap insurance.,

 
AGNC
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