I hope you are in full recovery mode Jess after the hospital stay. I wish you good health...
I think you both misunderstand the beauty of this trade if purchased at the right price. I pay through the nose for commissions from Fidelity on high option orders. The round trip for this Butterfly will cost me a few bucks North of $500 for commissions, on the 800 contract round trip(400 options on both sides).
You place the order as a "Butterfly" spread and bid a certain price. Right now the spread is -.42/+.42 with a midpoint of EVEN or zero cost. Are you kidding!! No MM will take it at EVEN(maybe), but maybe they will for .10, which would cost you $1,000 for the 100 contracts(BTW does everyone know that when you buy a Butterfly, or any spread, the cost you pay or the credit you receive is the bid/ask you enter times the number of contracts on the wing, or lowest member, not the body. That is, the ratio is 1:2:1, with the wings the 1's and the body the 2, hence "Butterfly").
So on the 100:200:100 Butterfly @ .10 cost, you pay 10.00 x 100 contracts or $1,000. Then you have the commissions( I pay)of $500.00, so a net cost of $1500 if I get filled @ .10. So that changes your BE on the 33/34/35Put Butterfly to 33.15 to 34.85, with the sweet spot being @ 34.00 at which point, if OPEX is @ 34.00 a profit on the 35 wing of .85 x 100 x 100 = $8500.
You let this expire to answer both your questions(so the spread is moot). I bet heavily on the OPEX coming before the EX date. So whatever price we are at on March 15th close will determine my profit. All I can lose is the $1500 cost(Do you get that part??). The beauty of the Butterfly is that you are protected beyond the 1500 cost down to zero PPS, IOW totally. If you get the trade at EVEN, SCORE!! You have a zero risk bet outside commissions...that is what is so incredible.
Get assigned..SCORE, if your brokerage will allow you to float the shares if you don't have the cash to buy them. As I said, then you want the EX to come before OPEX and you reap an extra 20,000 shares x the dividend...how great is that? Then post EX when OPEX comes everything dissolves in the mist because your Long 33s and 35s have you totally protected.
Suppose the PPS goes to 30 post EX @ OPEX. You were assigned @ 34 so you are down 4.00 on the 20,000 shares or $80,000. The 100, 35s are worth 5 x 100 x100 or $50,000(and assigned Short as 10,000 shares@35)and the 33s are worth 3 x 100 x 100 or $30,000(and assigned short as 10,000 shares @ 33), so you BE.
If the dividend is 1.25 you walk away from the trade with $25,000 (1.25 x 20,000) minus the commission. Pretty awesome..can I lose the $1500? You bet(outside 33-35 @ OPEX). Do I think it is worth the risk? My GTC order is waiting for the MM. I'll keep you posted...;-)
Disclaimer: You can be assigned on this trade and become responsible for buying the 20,000 shares @ 34 in this example @ a cost of $680,000. That was on a 100:200:100 Butterfly. If entering this trade please do so with enough resources to cover this potential cost. You can modify the number of contracts to meet this requirement, as an example 10:20:10 Butterfly, wherein your potential cost becomes $68,000, with a potential max reward of just over(commission difference) $850.
Learning Latin was easy compared to understanding options.
Doc, I just looked at the January 2014 Call Options with $30 strike price and compared it with the share price. The bid/ask $2.40-$2.62. AGNC is trading at $32.40. Normally a call option trades at a price above the strike price and that price is higher the longer the time to its expiration. I think they call that the "time premium". In this case it appears to be very low, close to zero.
Why is that? Can you explain?
Unless I am missing something, one could buy the call options and get the same swing in gain (or loss) as buying the shares, but without laying out nearly as much money. I know that one would not get the dividend but it still looks like a good way to bet on AGNC.
Thanks for the reply. I think you are correct that no MM is going to be interested at $0. I really have no feel for how much they would want so I hope you are able to get a decent execution. I've had disappointing results on getting fills on complex orders (through Fidelity) when I shave too much off the spread but I don't like to play the full spread either.