I looked back on ToS for the historicals on Shorting the ATM or near ITM Puts since Aug 2008, when AGNC was about 16.70. You would go out 6 months on the contracts. You never lost. You gave back some of your credit on a couple trades and you ended up with approximately 24.00 in credits to date.
At that point you don't have to worry too much about hedging with long Puts as you are just about free and clear to the PPS. Meaning if you short the Jun31Puts @ 3.60, currently, we would have to end up at less than 3.40PPS to go negative on your profits. That is , your BE is 3.40 PPS @ JunOPEX. You can roll your profits theoretically forever until the stock goes to zero and still end up ahead. Its getting to the profit BE that is the hard part.
I myself am continuing this process. My chronicler(Jonkai) keeps a journal of all of my trade ideas in an attempt to discredit me if any trades fail. Recently on the NLY board, comically, he has brought out a few trades he didn't understand and used them as examples of bad outcomes, when actually one made good money and the other BE. So I think you know there is risk here. For you can be assigned Long shares on any short Put position.
So how much money do you want to spend on shares, $300,000? OK, that is the equivalent of roughly 10,000 shares on Monday's PPS of 30.00. That is the same as 100 contracts of 30 strike options. You can presently get the 30 Put for about a 3.00 credit, which gives you $30,000. The same as you would get from two 1.25 dividends + some time premium(.50).
So you are off to the races collecting your dividends with a $30,000 credit. The PPS must be at 30.00 or above by JunOPEX to keep all of the 30,000. If it ended at 29.00 you would keep 20,000, down to 27.00 where you BE. Jonkai doesn't get that part.
While you held this position your non-margin buying power would be reduced by about 68,000, depending upon your brokerage.
Its best to have the buying power to cover any and all assigned shares , so be careful. I would not recommend commencing any short positions in Puts until after the FC outcome is clear. It is a fascinating trade that I like very much. It gives you the premium for the option, rather than forking out the capital, an amount you have to overcome, before money is made by OPEX.
Think about it...
As always, I wish you all much success and happiness.
I am very interested in your short put play over long periods, but do not have access to historical option prices. However, I was able to run numbers based on daily PPS over the same time period you used. I realize PPS is not as precise as using the actual option prices, but there is a relationship.
Assuming that BE is a 10% drop in PPS anytime within the next six months at time of trade open, and that the trade will be held until OPEX six months or assigned if less than BE during the period. That is, for example, if the PPS and strike is $30 at shorting, and the short credit is $3, then BE occurs at anything under strike minus 10% ($27). Given this condition, and the trade being initiated on any day through the history, the trade is profitable about 2/3 of the time. If the trade is initiated at each EX dividend date, it is profitable 70% of the time.
Using your $300,000 and 100 contracts exposure numbers, and six months as the time period, do you think it would be better to divide the trades over six consecutive months (17 contracts each) and do this continually, or plunge for the whole thing at one trade and wait six months for payoff and re-do. In the first instance, it would seem to level the playing field better. Six trades would be held all the time, but with a pay-off and re-start every month.
Thanks for the heads up about this. Your nuggets of knowledge and research are greatly appreciated
""or plunge for the whole thing at one trade and wait six months for payoff and re-do. In the first instance, it would seem to level the playing field better. Six trades would be held all the time, but with a pay-off and re-start every month"
After reading Duckman's post I better understand your question. As Duckman alluded to, the advantage of the 6 month time frame is that you receive the highest premium for the Puts because you are hopefully shorting right after the EX date, when the PPS is low and yet still retain a couple of dividends in the premium to help offset any weakness in the PPS going forward.
Where have you been hiding out!! I am impressed with your grasp of this concept and (my impression of) your excitement about the same. After reading your post, I went back to ToS(Ameritrade historical option values) and back tested both ways.
Options started trading on AGNC on July 25th, 2008 even though the IPO was on May 15, 2008. At the time of the first options, they were thin, wide spreads and furthest out contracts were 6 months, no leaps. Leaps didn't start until March 2011.
What I found was that Mar 11 would have been short the 13Jan30's @ 8.00, what a great price. Going forward from there every 6 months would have returned 8.98 to date, but you would be upside down on last Sept's Short13Mar36Put @ 3.00credit(ouch). I would have closed it out last Thursday, when I closed my Dec37Puts out @ PPS 31.55 for a 4.45 - 3.00 or 1.45 hit on the 36's, leaving us @ 6.85 profit since Mar 2011.
This time I shorted the next higher(ITM) strike each 6 months and on the Leap, giving a total return since the inception of option trading on AGNC of 29.78(6 month), or basically covering the price of admission for all future Shorts...sweet....coulda, woulda, shoulda...;-)
Hope your birthday was great!
You got me thinking.... If the Jun30 puts are $3 and 2 dividends are priced in at $1.25, does that mean that as soon as AGNC announces divi reduction, the puts will be repriced lower by the amount of the divi reduction?
If that's the case, then the further you can short the puts with $1.25 in them the better, right? Too bad the 14Jan and 15Jan puts are not offering much...
One advantage is that the JUN 31's have two 1.25 dividends plus about a buck of time value rolled in. If they cut the divvy, you already got it but the PPS might go down. (Or it might go up like it did when they cut from 1.40 to 1.25.)
I started down this road in my wife's IRA account. Severely limited without the margin capacity, I know, but it seemed a safe scheme with AMTG which had a lot of cash which I thought would temper downward movement. My "mistake" perhaps was going near month to near month. She got assigned, for an effective 21.75 share price. Not the worst and definitely not the best. Anyway, in this reit depression I think I will hold her for the dividend which she loves, and probably sell at the next reit rally and try again. I might be done with AMTG I don't quite get their management the way that Kain and company have taught us what to expect.
Doc, Do you ever put any mental energy into looking at overvalued issues? CRM is probably at the top of that list. Just as an uneducated shot, I thought a person could short it at a peak and buy protective calls. It will tank some day but it will kill a naked short in time. the thing is to have a strategy in place at the time that pays for itself and keeps one in position for the inevitable 120 point drop, or more. If it keeps up the insanity, the calls would hedge the short and could be used to cover near expiration at which time a new short is initiated at an even higher price. Six months ago I proposed a short scheme for amazon which, had anyone done, would have killed the shorter.
It is insane. It seems the less likely and able that these companies will ever have profits, the higher they go.
"It is insane. It seems the less likely and able that these companies will ever have profits, the higher they go."
the market can stay irrational longer than you can stay solvent.
whole lot of people out there that are irrational....from your perspective. maybe a paradigm shift is in order.
Hey, Doc. It would be great if you could "do the math" on one of these. I've not yet done this kinda thing. Buying calls is the only options I've done, and this is still a little confusing to me. Also, would you sell to open a put, to initiate this trade? Must you have a margin account to do this? Scottrade says that kind of order is not available.
Sorry for the simpleton questions, and thanks for the on-going advise.
MrWizard is correct...you are not in the driver's seat when you short Puts. You have to have level 4 option authority to also play the naked(non hedged) short trade also, with most brokerages. Hence your inability to play. Instead, you can employ shirt spreads, where you limit your profit and your risk by buying an option a certain distance away from the short strike. Most brokerages will allow you to trade this vehicle.
Look at the 13Jun30 Short options again. You have to short(usually) closer to the bid than the ask. So the bid is what I look at for shorting as the ask is what to look at for going Long. My screen will give me the midpoint between the two. I usually subtract/add about 5 cents, from the midpoint, giving the MM some love for these trades, and that is the theoretical number I use for the math. Get your drawing board out architect, here we go...;-)
This is a temporary anomaly because we are right before EX, but I think it is very illustrative and perhaps , a good learning experience. I talked recently about the Iron Butterfly. Here it is for January. Friday(21st) you could have, but should not have entered this trade. It employs a short spread of both Puts and Calls.
Short both the 30 strike Call and Put for 1.96 credit(bid), and Long the 31 Call and the 29 Put for a .81(ask). Net credit @ 1.15. Midpoint 1.25. If it was a normal trading day(not the DBEX) these numbers would have never been seen. The reason...you cannot lose but have to win(on non DBEX). Here is the theory:
In this trade you want the PPS to remain @ the short strike price @ OPEX for maximum profit. The reason, all option strikes expire worthless and you keep the entire 1.15 credit. Any direction the PPS moves from 30, (the short strike, in this example), the trade begins losing money from the 1.15 credit.
Ok, got that part? Next the BE(break even) points are defined as the short strike price minus the credit, for the Put side, and the strike price plus the credit for the Call side. With this caveat..those BE points are supposed to always fall within the boundaries of the spread, on each side. So normally you will get, for example, an .80 credit, on this trade. Then the BE points would be 30.80 upper and 29.20 lower. So you have a .20 risk on either side to the boundary of the long strikes.
Here though, even the bid is outside those boundaries. Btw, your brokerage should allow this trade, although I would not advise employing it for your first foray into the "dark" side...;-), because you can still be assigned on the short options, at any time, and that breaks apart the spread, and I don't answer distress calls on options after 12:00 PM PST...;-)
Bottom line, on this trade, the max you can lose is 1.00, the difference between the short strike and its long hedged strike, in either direction, on this specific example(said more generically, the max loss is the difference between the short and long strikes, minus the credit)and since in this universe the PPS can only go in one direction at a time and not occupy space on both sides of 30.00 at OPEX, then your 1.15-1.25 credit can only be reduced by 1.00 in the worse case scenario, leaving you with the 1.15(bid) credit reduced by 1.00 max, or a guaranteed .15 profit.
Well the MM's are not dumb and the reason this trade would be a little dicey(and not work) is that the Short Calls on the DBEX, trading BE @ the PPS(IOW 30 strike + 1.16 credit places you right @ the closing PPS on Friday(DBEX). In about 99.99% probability, those Calls would be assigned to you as Short Shares and on Monday you would be debited the dividend of 1.25(short share holders must pay, not receive, the dividend). You could "get around" this potential problem by buying the corresponding # of shares on the open of the 24th, and potentially BE(i.e., Your assigned shares would be at 30.00 PPS short+ your credit of 1.16 - the 1.25 dividend + the Long share purchase of 29.90..IF that is the opening price... = +.01, or BE).
Now, you've used up your credit balancing that side of the trade, and you have no credit left to balance the Put side...so "That" is why, you wouldn't have employed that trade on the 21st. If you have a good idea(guess) on where the PPS might be @ the next OPEX on any month though, you can employ this trade, shorting @ the strike you expect the PPS to end @ and getting as close as possible to your credit for the BE's.
Well, hopefully more didactic than pedantic, but there is the Iron Butterfly.
yes. sell to open. most brokers require a margin account and you have to have sufficient buying power to cover the share purchase if they are put to you.
like other option trades, no matter how good they look on the spreadsheet, there is the risk that you could end up with the shares, when the market is at much lower price than the strike. that or take huge bath exiting the position.
remember that when you sell an option, you are NOT in the driver's seat. the buyer is. the most important rule for short puts is: you have to be willing to own the shares. if you are not, then stay long calls.