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American Capital Agency Corp. Message Board

  • channelcat57 channelcat57 Dec 28, 2012 10:10 PM Flag

    hey doc

    I'm down 6600 at an average cost basis of 35.40 spread over a brokerage account and two IRAs. 1071 shares total. Bought too high.I want to stay long, but dont want to commit more capital 'doubling down', is there an option strategy you could suggest based on my belief of a current bottom and a 32 pps within the next six months that has the potential to recoup that 6600 and let me rest easy holding the shares till the appreciation and divy adds up to my cost basis, where I can bail or not, or widespread armed civil insurrection occurs, in which case I'll take whatevers on the table, and head for the hills. I dont think that second scenario will happen in the next six months. I have some dry powder, and dont have to take a loss on other positions to finance an option hedge. What you think?

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    • no revolution in six month buddy, maybe six years, BIG MAYBE.

    • Hey Channelcat57,

      "" is there an option strategy you could suggest based on my belief of a current bottom and a 32 pps within the next six months that has the potential to recoup that 6600 and let me rest easy holding the shares till the appreciation and divy adds up to my cost basis, where I can bail or not""

      Thank you for giving me the "givens". I wish it were always that easy...;-) I would give you the same advice as I gave Herronr82, on the thread "I'm Suffering People", posted Dec27th. Park all of your shares of AGNC in 15Jan25Calls @ 4.35. That is only a .35/share haircut over today's closing price.

      What are the potential fall outs...well, excepting nuclear fall out and such, (Assuming 1,000 shares = 10 contracts):

      1) The PPS goes up. Yayy! Sell your Calls for a profit on the date of your choosing, or exercise them before the Mar EX date and collect your dividend on the shares.

      2) The PPS stays at 29.00 until the DBEX in March. Sell the Calls and take the .35/share sign up haircut, or exercise for the .35/share haircut and take your dividend.

      3) The PPS goes down below 29.00 @ the DBEX in March. Continue to hold until future potential recovery(you have until Jan 2015), and on a future EX date see 1) above.

      Here is the deal. Folks think options are so much more scary than holding shares. Well suppose, door #3 happens and we take a hit down to 25.00 by 13March EX date? What has happened? Those 15Jan25Calls are now worth 1.50, or 26.50 BE. Your shares, if held, are worth 25.00. You have now lost 4.00/share on the shares or $4,000(paper). The Calls have lost 2.85/share or $2850.00.

      Your choice. You can continue to hold the shares and collect the 1.00(?) dividend, or you can sell your Calls and buy shares @ 25.00(market, basis 23.85(4.35-1.50))decreasing your basis by 1.15 with the Calls. This is not rocket science. Sure if the PPS goes down to 20.00 the Calls are worth .50, meaning you are still up by having a basis of 19.50 over the shares.

      So, its a no brainer to trade your shares for the ITM Calls when you can exchange the shares pretty close to par with the current PPS(until we add that first dividend, in March!!) So take this as a two and a half month plan, and ask me at that time what's next...;-)

      Questions?

      BTW..If we do get your 32 by Mar EX you can cash those 10 contracts in @ 7.00/contract or $7,000 minus cost of $4350 = $2650 profit. To get to your $6600 profit you will need 2.5x as many contracts or 25(cost $10,875) @ 32.00 PPS those are worth $17,500. Difference $6625.

      Good luck in whatever you decide!

      DocReits

 
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