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American Capital Agency Corp. Message Board

  • reits_r_us reits_r_us Dec 13, 2012 11:33 AM Flag

    MM's are getting nervous

    Hey everyone,

    Have you noticed how the Put pricing is all down today around the whole spectrum, but especially the ATM strikes? What's with that? When the PPS suffers the Put pricing is supposed to rise...;-)

    Looks like the MM's are saying words like, "Shoot!", and "we may have gotten the EX date wrong, and we are going to be on the hook for all of these hedged Puts".

    C'mon AGNC, don't announce this week!!!


    Sentiment: Strong Buy

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    • while i am not an options maven, and know just enough to stay away from all but the most obvious plays, i am somewhat of a market maker maven. in theory, and this time might just be a contrary time, MM's make their money on the spread between bid and ask, and therefore adjust their posted B and A to get equal action from the buy and sell sides. just like a bookie, in fact, who adjusts the odds/point spread so that the losers pay the winners and the book. the ideal position for a MM at the close is nothing in the book, or at most, enough to get through the open. but that risks overnight news.

      a MM does not want to be the bag holder. no crystal balls for them either.

      • 2 Replies to mrwizard9090
      • Hi Mr Wizard,

        Whwn the MM prices the Puts they include the dividend in the ATM and higher Puts for those contract months which are in the future, which will contain X number of dividends. The MM's are thinking(IMO) a 1.00 dividend going forward, so 15Jan 32Puts are priced at 10.50 because they contain 9 dividends(1.00 x 9) + 1.50(difference in today's PPS and 32.00).

        Now, my original post meant that when the MM's sell that 15Jan32PUT @ 10.50 to the Long Put holder, they simultaneously short the corresponding number of shares @ market to hedge their position. They have to pay the dividend on their short share hedge and that is why they increase the price of the Puts(to the Long Put purchaser), in order to cover that cost.

        Likewise, when I short that Put, they buy the corresponding number of shares to hedge my short position. EX gets placed after the OPEX and the 32Puts lose 1.25 in value. The MM paid 1.25 more than he had to and he has no value in the Long shares to get it back. IOW, if he thought the EX would be after OPEX he would have paid 1.25 less for the Puts. Now he does not get the 1.25 dividend on the expiring option he bought from me, because the options expire before EX. He is SOL and out the dividend for Dec that was originally in the Put he bought from me.

        That is a long explanation and I was waiting for the person(you...;-)) to ask how the MM's get raked over, when they have bet already on the EX being pre OPEX, and then the EX is placed post OPEX.



        Sentiment: Strong Buy

      • I just rolled my long DEC 28 puts to 29 for .09, so now I have 29/30 put spread. Paying 9 cents seemed like a good deal to get a dollar's worth of protection. I will sleep better.

    • I think MM stands for
      Market Madness.
      Nothing makes sense to me this autumn. Perfectly good investments tanking and others that have never shown a profit shooting for the sky.[amzn, crm]
      Gotta confess Doc, it's enough to pessme the phrickoff.

      I agree with your call, even if they announce this week it is a little late to squeeze in the xd before opex.
      My 30s are in March. Gave myself enough time that if they do not show for xd perhaps earnings in febr will give a lift.
      At that time I am looking for more profit on sale of inventory and subsequent share buybacks to keep book on par. Selling... like say on Days Like This when we are a good two bucks below book. Like an oil trust, nothing wrong with sale of assets for big profit during contraction times.

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