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American Capital Agency Corp. Message Board

  • instantwinbutton instantwinbutton Mar 4, 2013 12:44 PM Flag

    Short the $31 march puts 31 strike. -Still a great play

    They are at 0.15 with 12 days to expire. The value of these are on a quick pace to be wiped out. So the rate of loss on the puts (your gain) is 0.0125 per day, even weekends. 90 days each quarter between dividends of $1.25, the pay rate is equal to that of the dividend, yet if you are assigned you get the shares at a discount of 0.60 to the offering price of $31.60 and STILL collect the Q1 distribution.

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    • Great trade!

    • bowhunterron Mar 5, 2013 6:53 AM Flag

      Just a note to instantwinbutton and Doc. I thank you both for your views on this trade. I just recently requested and got approved to sell uncovered puts and this is my first trade so the discussion is timely. You both gave me a lot to reconsider, I also discounted any chance of Ex before Mar 15th, not so sure now. I made a small trade to see the mechanics of the trade and will not be impacted if trade goes against me. Thanks again for the imput as I am new to selling puts.

    • IWB,

      You are still touting these @ .11-.14/contract, and not properly describing risks.

      1) A major risk which the March short Put trader encounters is an EX date before Mar 15th. That is looking pretty unlikely, but the risk is still there. If that happens those Mar31Puts @ today's close(31.91) will be .59 ask, or 500% down. The short trader will also "not" likely be assigned as the Puts will not be ITM, and the trader will therefore not collect the dividend as they will not be assigned Long shares.

      2)Secondly, you talk about worse case as owning at 31.00. How many contracts do you think the short Put trader will short @ 11.00 credit/contract? One, two? That would hardly cover their price of admission(commissions). No, they will most likely want 50 or more so they can at least make a few hundred dollars. That is a 5000 share times 31 commitment , or $155,000 to cover assignment.

      Scenario one above occurs. Its now not worth a few hundred bucks credit, IMO. If the MMs had thought we would have an early EX and priced the Puts accordingly, like last Q...that would be when to short Puts.

      3) Never short Puts on an up day. Short Puts on down or especially disaster flash crash, down days. That is when the premium is highest and you get the most credit.

      Hopefully this helps those listening in on short Put trading.


      • 2 Replies to reits_r_us
      • Your points are well made, selling Puts is not without substantial risk. Perhaps a bull Put spread might be a better approach if that's how he wants to trade options.

        However, the capital requirements for the short Put are the same as owning the shares at that strike unless you have options level 4..

        For AGNC, Puts have a vital and strategic role to play, but it's not as a cash-covered short trade.

      • #1. There is no risk of the EX date being before March 15th. 0.. none.. zip.
        #2. Time to expiration is going to continue to destroy these options quickly. Up day isn't the best to short - I agree, but the up or down 2morrow the option will probably still be priced even lower - unless its a really heavy down day for AGNC.
        #3. You know the risk is 0 for the EX date being before March 15, yet you want to scare people? The ex date is always at least 2 weeks after the announcement date.. There has been no announcement and the market markers know the EX dividend will be after opex.
        #4. Selling puts is obviously more effective if you have a larger capital base due to trading costs.

    • bowhunterron Mar 4, 2013 1:58 PM Flag

      I am in this play with you, just shorted 31 Mar puts as well.

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