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American Capital Agency Corp. Message Board

  • reits_r_us reits_r_us Dec 24, 2012 1:17 AM Flag

    Short Puts Remastered..The dividend capture game

    I promised an illustration of how, with a high dividend security, which continues its regular dividends, you can continue to make as much money as the long share holder, in dividends, with short Puts. There is an addendum to that statement mentioned at the end of this post, but here is an example to help illustrate this phenomenon.

    We will take one of the poorer performing mReits over the past 4 years, which has been up and down in dividends and down in PPS over that time as our example. It is a mReit I would never recommend owning because of its continuing trend down in PPS as well as 6 dividend cuts over the last three years. It also has among the highest CPR's of all mReits. We all know who it is , I think, .....NLY.

    Here are the numbers and the criteria. Short the ATM Puts as far out as possible starting arbitrarily(as far back as my historical option site allowed) to 5/19/2008@ PPS of 17.65(yes, NLY even traded up around 21.00 at one time). The 10Jan17.50 Short Put Leaps were @ 3.90 bid as our credit. @ OPEX in 10Jan(1/22/20) PPS @ 17.07, nicking 43 cents off the 3.90 leaving 3.47 intact as our take home pay.

    Next leap was 12Jan17.50 @ 5.25 credit ending @ 1/20/12 OPEX @ PPS of 17.21 for a nick of 29 cents leaving 4.96 as our take. Next leap I took was 13Jan, since 14Jan is a little hard to back test...;-)
    13Jan17.50 @ 3.00 credit. I closed this out last Friday(Dec21) as this is the 23rd of Dec. Loss 3.30 or net 30 cents on the year.


    8.13 credit since 5/19/08 on the short Puts. Change in PPS over that time = minus 2.95 dollars. Dividends given out 10.83. Therefore 10.83 - 2.95 = 7.88, was the net change for the share holder over that time. This was just slightly less than the credits received on the short Puts(8.13). Interestingly if the PPS had remained stable since 12Jan OPEX, the Short Puts would have returned 11.13 and the long share holder would have made the dividends of 10.83, again about a wash, and hence my point of this thread, that shorting Puts is an effective means of collecting dividends without investing the cash in the underlying.


    Where the short Put suffers over the share holder is during times of capital appreciation in the underlying. When the PPS goes down over leap time periods , as my example showed, the share holder and the short Put trader perform similarly. When the PPS appreciates like AGNC has from 19.50 to 31.13, that adds on another 11.63 in capital appreciation. This difference between the share holder and the short Put trader can be mitigated by shorting deeper ITM Puts.

    To explore further this case I back tested that mother of all terrible mReits, CIM. I tested over the 4 year time frame again, going out the max of 6 months(no leaps) and found from a high of 10.84 on 6/2008 to the current PPS(2.64), shorting the furthest out strikes(ITM) gave a net loss over the 4 years of 5.82. This then compared to the decline in PPS of 8.2 over the same period, but, when dividends(2.28) were subtracted from the loss, the loss to the share holder was 5.92, virtually identical to the short Put trader.

    Now going back to an appreciating stock like AGNC, I then shorted the furthest ITM Puts for each furthest out contract month. These again were only available 6 months out until Mar 2011. The results showed a short Put credit of 29.95 since July 25, 2008 through last Friday(12/21). Buy and hold from that time showed a CA of 15.75 and dividends of 22.30 for a total gain of 38.05. An 8.10 advantage of buy and hold in an appreciating PPS environment.

    Hopefully this gives another glimpse into the fascinating Short Put trade on high dividend securities, and more to digest over your Christmas Holiday.

    Merry Christmas!


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    • its a shame. it brings to mind the saying that "you can lead a horse to water......"
      in this case, doc reits did a superb job of trying to lead a horse (or horses) to water
      and as we can see, they choose not only to not drink, but they are so totally lost that
      they do not even recognize it as water. that's right. folks like sbrown and mr. phil
      are so dumb that they must have rabies !!! stay away from them everyone !!! what they
      have is catching. its called "rectal-linear dumbness" and it is now airborne !!! yikes !!!

    • Your mastery of this subject, and willingness to share, is astounding. This is an education that is much appreciated for a newbie.....

    • Doc,
      I followed that after the third read.
      I don't have access to historical option pricing but I wonder how that might compare to a month-to-month short put strategy. If you write the puts on dips, the collected premiums are substantially more than the div and It keeps you tighter to the share price dynamic.
      I suspect in the month to month scheme, one might get exercised[as I did last month] more often without the protection of a more distant opex date. On a rising equity, like MTGE or WMC, getting exercised is not a bad thing, and the probability of selling the subsequent shares for a profit.
      PS. the shares put to me are already in positive ground.

    • You may be a good option trader, but I would refrain from posting anything until you are able to clearly explain what you are doing. This is the most confusing tripe that I have ever read

      • 1 Reply to sbrown101750
      • Really funny sbrown...Merry Christmas!

        ""but I would refrain from posting anything until you are able to clearly explain what you are doing""

        Does that mean you are too dense to understand or that you just refuse to understand? The former accompanies my sympathy, the latter... Uncle Scrooge's boot!

        Knowing your lucidity, I think the latter.

        Keep digging..there's gold in them hills...;-)


    • this morning's open provides a useful example of the possibilities for shorting puts.

      AGNC opened very close to 30. some jan 2014 puts went at 5. nice round numbers. what happens if you sell the put?

      1. share price goes up and the put expires worthless. you get to keep the 5.
      2. share price goes up, and you decide to exit the position, taking a smaller profit.
      3. share price goes nowhere special, so you exit just before expiration to avoid being put the shares. you get most of the 5.
      4. share price goes down some, which raises the price of your put. if you want to exit, it will cost you something. as long as it is above 25 at expiration, you still made some money.
      5. share price goes down a bunch to say 22. at expiration, since it is in the money, it gets automatically assigned. you now own the shares at 25(strike of 30 minus the 5 premium) that are only worth 22.

      there are other variations. even if the put is in the money, whoever owns it can choose to not exercise on expiration. so it is possible to not be assigned. assignment is random, it is possible that you get assigned when somebody who bought one for cheap back in the 36 days decides that enough is enough.

      Doc did a good job of laying the whole thing out, but remember that what might look like a sure thing still has some risks. think about what a flash crash down to 22 could do to you if you are not sitting right in front of the keyboard. remember that the other guys have really fast computers, and it's all they do.

      • 2 Replies to mrwizard9090
      • MrWizard,

        I read your post the other day and am now able to reply(opening presents...;-)) There are some items in your list I have covered in the past, but allow me to reply to the more pressing issues for those considering these instruments(Short Puts).

        #5) What you say is correct. ""share price goes down a bunch to say 22. at expiration, since it is in the money, it gets automatically assigned"". You set up the correct basis for assignment here and the resulting position of the trader writing the Put if that trader holds the Short Put through expiration.

        That is not the same premise(22.00 PPS @ OPEX) which you end your post upon, although you allude to the same outcome(assignment). There is quite a difference, which I have written about at length, and briefly summarize below.

        That is:

        1) always have the cash purchasing power to cover assignment when writing Puts
        2) "Any" time during the contract the writer of a Put contract may have the shares assigned, whether the option is in, at, or out of the money.

        This is my main point that was misleading in your post:

        ""think about what a flash crash down to 22 could do to you if you are not sitting right in front of the keyboard""

        OK, I bite. Explain to me what I am to 'think about'? Then, after your explanation, explain how my position away from my keyboard, differs from the long share holder who is Long, at a basis of 25.00? If you conclude correctly, that there is absolutely no difference, which is correct, then are you suggesting, by extension, that all share holders equal to or greater than a 25.00 basis, do the same thing?

        My guess is that you are not thinking straight about assignment between those who are not cash covered and those who are. Your argument has merit, when speaking of the former, but no merit, the latter. The latter being the only position I have warned extensively to assume, when writing Puts.



      • The chances of having a short in the money option not exercised are slim to none. In the money options are auto-exercised so it would mean the owner notified his broker to leave money on the table.

    • This very interesting material. Thanks for posting it.

      Would the results change significantly given equal investment amounts?

      • 2 Replies to jess_1554
      • Yes, but I suggest that you begin Jess @ OIC Education on the web. They offer, for free, basic option instruction, including the difference between buying an option and writing an option. The premise in my post was in "writing" the Put options , which gives you a credit, so you are not actually purchasing anything, until the contract nears a future date.

        Good luck,


      • Not for me. Much to learn and the tuition can be high. My Fathers advice to me as a young man "don't play the other mans game". Free investment advice can be costly There are numerous people who offer training with options MotleyFools and Vector Vest. Not seeking to become rich, I will continue with MLP pipelines,Preferred and Blue Chip stock with a few bond funds. I trade more than I like in this declining PPS environment.

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