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American Capital Agency Corp. Message Board

  • bertegle bertegle Dec 13, 2010 2:07 PM Flag

    Buy The Shares vs Options?

    How many on this board would risk buying 1000 contracts @.20 (Dec $29.00) costing $20000 right after the recent offering? The profit would be $55000. I wish I would of done that I only bought 10 contracts. Is the risk too high? Maybe I'm beeing too gready.

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    • I believe it is too risky. I would rather go for the jan 29 for safety purposes (i have 106 contracts on those), or go for the jan 30, but it is risky as well, don't know if it is worth doing.

      • 1 Reply to arshakandriasov
      • Good for you Arsh!! Merry Christmas!!

        The question comes down to risk/reward. For every strike further "away from the money" the potential loss increases. On the other hand if the stock moves in your direction the higher potential % gain you reap.

        ITM(in the money) options give more $$$ reward for movement but less leverage, i.e. less % return per dollar invested.They carry less potential risk of expiring worthless but still can suffer catastrophic loss on significant downturns.

        Your example illustrates this in that those DEC 29's were a good trade. They could have been disastrous if the secondary had been like the last and taken two weeks to recover. Bye, Bye $20,000.

        As I have said over and over if you trade options you need an edge in knowing(educated guess) the likely PPS movement. In this case we "guessed" that there would be an upswing toward announcement and divi. This time we were right, if you unload now. We could be wrong if divi is $1.00 and we hold.

        But I am making an educated guess that we'll see $1.40 and have movement to 30-31.5, therefore I hold.

        Yes, options are more of a gamble as a rule than holding the shares. That's why most of us gamblers hang out on this board because this stock is one of the most consistent stocks to gamble with.

        Sorry for ending with a preposition Jim. Nice new identity.

    • I stay away from options.

      When I buy the shares, the dividend is my hedge if the price movement doesn't go the way I expect.

    • May I clarify this. I made a typo. I would not buy the calls if they decrease the dividend.

    • yeah that's what i thought

    • Thanks for explaining options to me Ben.

      I did not realize the profit margin was so high, and the risk loss so low. I will have to research more about options on the TD Ameritrade website.

    • To all the posts I got, a big thank you. If I had it to do over again I would buy 100 contracts, risking $2000 instead of $20000. I don't understand option strategies completely yet. I also own ANGC stock as well. Like Ben said the next risk is the declaration for price of div. History has it at $1.40, but any thing can happen. Option players, how long do you hold Dec29 Calls?

      Herb

    • There are no Dec. 29 calls, only Dec. 17 this Friday. I think you are asking a decay quesion, but the next part of the question depends on how far in the money versus how far out of the money. ITM decays a bit less, but nonetheless, you have to sell any Dec. options by Friday unless you want to exercise and buy the shares.

      You willl not want to exercise and buy the shares unless the strike price plus your option cost is less than the share price on the date of exercise.

      With that question, I hope you aren't holding any calls.

    • I just want to point out that even when AGNC did cut their dividend from 1.20 in December 2008 to .85 in March 2009, the stock price still moved from 16.30 on Feb. 27, 2009 to 17.81 on the day before ex (March 30th).

      I like the strategy of buying near the opening bell on the last day of the month prior to ex-dividend date, and selling on the day before ex-dividend around close. If this strategy was used, here's the gains you would have realized on the stock price during that period during the last two years:

      September 2010: +2.19
      June 2010: +3.24
      March 2010: +3.01
      December 2009: +2.45
      September 2009: +5.28
      June 2009: +4.25
      March 2009: +1.51

      Given this history, I'd say a $2 run from $29.43 (open price on November 30th) is not only completely possible, but pretty likely. Especially given how fast the stock recovered from the shares released last week, I think we're going to be in a strong upward trend until the ex date. Personally, I trade options... with a stock this predictable, I think call options are a fairly safe bet and will make a lot more money than the stock in the same amount of time.

    • G55 I like to trade this stock like you. If I can get more than the div, why not take it? Especially since the div is not for sure. That last day of month before ex i must check out.

      Last quarter the stock went down on the day before the ex, but this was an exception. The high range has been 4 to 5 days before th ex. Thanks for the stradegy.

      Herb

    • Olee, the first thing you need to do is apply for level 1 options. Once that it is done and you are really wanting to give it go, let me know and we can walk you through it. Watch it now (just watch the call prices on yahoo as the stock moves). Maybe, if you get set-up, you can do it next quarter.

      I am not promoting this idea for you to take some huge risk, but to learn to make more with less. YOu can control the leverage you take on. Options allow us small guys to punch above our weight. I would view it as a supplement to your basic stock picking skills and knowledge of AGNC.

      You can also sell covered calls too, assuming there is a good target. There are several conventions I use (and break all of the time):

      1) Buy ITM (option price less than stock price);

      2) Buy far enough out to more than cover the dividend declaration and ex-dividend

      3) Sell before earnings or before declaration of dividend, unless you have to consider otherwise

      4) Sell when the profit margin hits 10% or better unless you can justify staying in.

      Calls have a lot more volatility than the shares, so you find yourself agonizing over a $.10 fall sometimes. That is just the way it it is.

      There are some on the board who would disagree with my conventions, and I respect that too. However, an option loss can set you back by a lot if you get it wrong.

      The more ITM and the longer the date, the more relaxed you can be about it. I always pay for the extra quarter.

      There is something else you need to know which is a real economic issue and also affects psychology. When you buy a call (or a share) there is bid/ask spread. AGNC's calls are considered thinly traded, which means there isnt' as much liqudity as say APPLE. Your account will show a loss until the stock prices covers your instrinsic price.

      So, tomorrow just look at the following just to learn (not to trade);

      March 18 calls, Strike $26. Cost $3.80. (Bid $3.50).

      The intrinsic is $26 plus $3.80 = $29.80

      The share price now is $29.60.

      $29.60 - $29.80 = (.20) loss.

      The stock has to rise to more than $29.80.

      The commission costs are about $15.

      Each contract equals 100 shares, so you have to buy a minimum of 100 x $3.80 or $3,800.

      So, if the underlying hits $31:

      $31 - $29.80 = $1.20

      Total deal

      Cost 100 x $3.80 = $3,800
      Commission = 16
      Total $3,816

      Value .100 x $5.00 $5,000
      Commission 16
      Total $4,984

      Profit $1,168
      Profit percentage 31%

      Underlying Increase 31.00 - $29.60 = $1.40
      Underlying percentage 5%

      So, a 5% increase yields a 31% call return.

      Your risk of loss is $3,816.

      Would you lose it all? Probably not, unless the stock falls to $20 or something or you let the option expire.

      The impact of the bid/ask spread on your acount. Until your day of profit, you will have a negative amount in your account for the spread. The dealer is asking $3.80, but if you turned around and sold them straight away he would only give you $3.50.

      For your investment of $3,816, you will be down by the spread or about $763. You just have to get used to this issue.

      This is why you want (at first - and still true for me today) deep ITM. You want the call to be very responsive to an increase in the price of the underlying price.

      The more in the money, the more money you have to put at risk or the higher the cost of the option. It make sense. YOu bookie will charge you more for a sure bet.

      You can buy more out of the money, like the March 29's, which are $1.10. So, that would only cost you $1,100 for 100 calls, but your intrinsic is $30.10, not $29.80. That is a big deal in the world of calls. However, your return in the above example, will rise to $31 - $30.10 = .90/$1.10 or 82%. So, by buying OTM calls, you get a much better return. The 5% increase results in an 80% return.

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