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American Capital Agency Corp. Message Board

  • slegermark slegermark Dec 18, 2012 1:21 PM Flag

    Rookie question on writing naked calls.

    Assume next week we top out at 32.69
    Say it is the day before ex div and you can get somebody to buy 33calls. On xd the price drops well below 33. Wouldn't that be like dumb money? unless the price recovers to 33 by Jan opex?

    I'm still allowed to be a rookie until feb

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    • YBF,

      I understand about the weird placement of the EX in relation to the pay date for truly "Special Dividends" That is moot anymore as it seems to apply to some "special" dividends but not to others(and I am not talking regular dividends), eg Costco and WNR. In question presently is what you state here:

      ""The OCC used to adjust options when special divs were over 10% of the underlying. Now they do it when the special div is more than $12.50 per contract (i.e., an eighth of a dollar per share""

      You are right, it used to be 10%, then it changed to 25% of the underlying PPS, and (thank you) now they consider it special for as low as 12 and 1/2 cents/share. But you will note, as I explained, that Costco actually changed the strikes from say 105 to 98 on their "special" 7.00 on the EX date this month, whereas, WNR on their 1.50 "special" dividend did not.

      Instead WNR adjusted the number of shares per contract to reflect the new valuation. What is the determining factor which differentiates the means to basically arrive at these same ends? That was my question...

      DocReits

      Sentiment: Strong Buy

    • Would the calls make any money if AGNC tops $34+ next week?
      That would make us longs happy.
      Just a question.

      Sentiment: Buy

    • If you own the stock, sell the 32 covered calls today for an extra 7 cents ... They expire in 2 days.

    • Hey Slegermark,

      I was waiting for someone to answer the question you asked and I am still waiting...;-) We have had this discussion many times over the last three years(12 times probably, IOW every Q) and YBF answered it best when he said it is generally not worth it. Why, should be your question?

      The answer is that the Calls do not decline as much as you would expect in premium, given a huge (1.25) decline in PPS. The reason is the same as why the leap ATM Call options trade often @ or sometimes, paradoxically, lower than the current or front month.

      The MM's want the system to remain neutral and will not allow for a capture on the Put premium or on the Call premium. They kill you on the spread. It is a neutral game on options over the EX. To discover this here is a sample from last Sept 18th(DBEX). PPS @ 36.39(the good old days), next day's close 1.55 less @ 34.84. Arbitrary later date 10/16 @ 32.00(keep in mind that is a 4.39 decrease in PPS from the DBEX).

      Now here are the numbers for all forward contract months beginning at Dec for the 37 OTM Call option:

      ....................9/18...........9/19............10/16.................................................................

      Dec,37........(.25bid)........(.30ask)........(.11ask)..............................................................
      13Jan,37.....(.25bid)........(.34ask).........(.13ask).............................................................
      13Mar,37.....(.39bid)........(.45ask).........(.22ask)...........................................................
      14Jan,37......(.55bid)........(.75ask).........(.56ask)...........................................................

      So even though the PPS went down more than the dividend on the EX, last Q, the spread still ate your lunch.. The striking point is that it took over a 4.00 drop in PPS from the DBEX to reduce the ask by 50% of the bid, and remarkably the 14Jan was still @ BE.

      Copy and paste this example as a keeper because I cannot find my similar descriptions with this fouled up Yahoo MB...;-)

      Make sense?

      DocReits

      Sentiment: Strong Buy

      • 1 Reply to reits_r_us
      • Absolutely makes sense. Thanks. Dummy me. I remember explaining this to a fellow trader when EPD was giving us fits. I told him that his calls would not drop in price on xd. It was true.

        Here is what I was secretly working on.

        WNR refining pays a special tomorrow. So it is too late to do anything now. the closing price of 30.65 should drop by the 1.50 special and open tomorrow morning at 29.15

        Up until the markets closed this afternoon the december 30calls were selling for .76. The last bid was .80

        Could A person have shorted the dec 30call at .80 and safely bagged a big profit? The pps was probably not going to recover. Also the next day there is no way the premium for the otm 30 would be anywhere near .80 when opex is two days away. So then buy them back for a nickel and be done. I guess we will find out.
        Would that be harvesting arbitrage?

    • anybody buying your calls under those conditions would indeed be dumb money, if they paid anything like enough to make it worthwhile. knowing a dividend drop is coming, i would not pay more than a penny. after ex, they are still worth a penny.

      • 1 Reply to mrwizard9090
      • Also, say you short the Jan. 32's for 10 cents on the DBEX. On ex, you are still short the 32's so you don't just make the $1000. You have to cover those calls or wait until they expire in January.

        Take a look at MITT. They went ex on 12/14. They have rallied back to around the pre-ex price.

        I'm not saying it won't work but rather simply pointing out the risks.

    • Rookies should not write naked calls. They are the most dangerous of any option play. For brokers who have "option trading levels" it's the highest level. Brokers like Thinkorswim who specialize in options don't have trading levels but they expect you to have some experience.

    • You're not going to be able to sell them for much. They are 10 cents right now.

 
AGNC
22.25-0.21(-0.93%)Sep 22 4:00 PMEDT

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