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American Capital Agency Corp. Message Board

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  • ephort ephort Jan 9, 2013 5:29 PM Flag

    Hey Ephort!!

    And I was wondering why I was sneezing all day.

    I would view (and analyze) this as two different trades:

    (a) The long stock at 25.
    (b) The short strangle (sell the 15 call and the 35 put).

    If you can get a $1 credit for the strangle, that's your $1 profit on position (b) (between PPS 15 and 35, a pretty safe range). (Right now it looks like you can get only .30 though). A lot people sell strangles (and condors, for more safety) on a regular basis for steady income.

    Position (a) has a very different profile -- the familiar one of a long stock (with dividend). Chances are it will dominate the outcome of (a)+(b).

    So yes, everything that you say is correct -- but can we call it arbitrage? I would call (b) a high probability trade -- in the class of selling deep OTM or (as in this case) deep ITM options. (High probability, but the risk is, in theory, unlimited). And I would call (a) a separate trade (with a significant amount of risk).

    BTW the ITM strangle is called "gut" by some people. Who knows why.

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