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American Capital Agency Corp. Message Board

  • raybans2 raybans2 Mar 15, 2013 12:37 PM Flag

    Fidelity's answer about sale of call option right before the ex date time limit

    I asked my broker what could happen if I sold a $32 April call option in at 3:59 eastern today. The broker said that Fidelity customers who own that call would have to 4:20 today to exercise it with Fidelity and they would randomly chose a customer to exercise it with. If they chose me and I did not own the stocks, i.e. it was not a covered call, then I would have a short position for AGNC stock opened in my account. I could immediately sell the short at a profit on Monday but I would owe the dividend so it would be a wash. My guess is that anyone who owns such a call would exercise it before 4:20 unless they were asleep at the wheel. Basically you are hoping that there are people out their buying calls on a high dividend stock and holding it through the ex date and what is the likelihood of that? I guess one could go fishing and see if they can snag such a person every once in a while but it may take several attempts and you would have to keep an eye on the commissions. Sounds like more work than it is worth.

    I also asked if I could sell a cash covered call in an IRA account and I can't. Only cash covered puts or covered calls meaning I own the stock as well. There is no such thing as a cash covered call because the losses could be infinite in theory. You can only sell uncovered calls in a margin account which excludes IRAs. However certain combination option trades that limit the losses can be done but you need the equivalent of cash that equals the maximum possible loss to cover the trade. My IRA accounts are approved for any kind of option trade as long as they fit with in these additional restrictions placed on IRA accounts by the government. Nothing is ever easy.

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    • Bump.............

    • I have made such a trade several times in the past. Just as the market closed, I would sell 10- 20 naked calls on agnc or other high div. paying stocks. This usually took place on a Fri. But not always. On the next trading day, I would find a short position in my account for 1000 shares around 7:30 am. When the market opened, I would buy the shares back at the ex div price. This left me with thousands of dollars in my account as profit. I repeated this process many times and built up a huge cash reserve. I received no correspondence from the broker and thought i was on to something. All was well until the div pay date, at which time I found My account was debited for the div amount. This experience cost me the commissions plus the difference between what I was able to buy the stock and the x div price. Actually worked in my favor with CYS as the price continued to fall below the ex div price.

      Go ahead and try this for yourself if you want but I expect that your experience will be similar to mine. By the way, I use Etrade as broker.

      Good luck,


      Sentiment: Buy

    • yourbestfriendintheworld yourbestfriendintheworld Mar 15, 2013 4:17 PM Flag

      Brokers have 90 seconds after close to enter orders, and 90 minutes after that to enter corrections, but a firm order of an exercise can be taken at any time, day or night, until expiration.

      Fidelity may tell its order-takers to go home at 4:20 ET, but a more service-oriented broker will accept the firm order whenever it's given, and at that point it's binding on the system. It will take them some work to make it actually happen if it's given after-hours, but when it comes down to people suing each other months later over whether it happened legally, then the timing of the firm order given to the broker is the key, not anything he may have done to forward it to the OCC for clearing. (And I don't know about Fidelity, but E*Trade requires exercise orders to be given over the phone, not online, probably so they can go through a litany of disclaimers and accounting checks before allowing the firm order to be recorded.)

      He is correct about unlimited-risk positions being banned in a non-margin account. Get a play-money account on the margin side if you want to do those things, and consider the money spent the moment you fund the account, because it might as well be....

    • Ray, aren't you talking about dividend capture? The huge volume/IO ratio for April calls seem like people willing to play the assignment lottery.

      Same thing seems to be going on with MTGE Apr 25's.

    • There simply is not enough extrinsic value in any of the options to make that sort of thing viable - even out to Sep. and the leaps are not trading the 33 and 34 strikes at all. My plan is to wait til Monday. The april options will price higher without the dividend risk and if we open around 32 then the 32 or 33 strike might be attractive for a covered call. Thanks be to option gods for causing a price dip a couple weeks back with the secondary noise - that enabled me to buy back my 31 calls profitably.

    • Did you not read my explanation earlier? Your broker only confirmed what I already told you.

      You are wrong on this depending on your brokerage house:

      " You can only sell uncovered calls in a margin account which excludes IRAs"

      I have level 5 privileges in my 401k account at Fidelity. I can trade whatever I want. They base this in part on your experience.


      • 1 Reply to reits_r_us
      • I believe that in an IRA account that all possible losses of an options trade needs to be covered by cash. Since the losses on an uncovered call are open ended there is no possible way to cover the theoretically possible losses. However I'm not sure if she was referring to my account privileges or all account privileges when referring to IRAs. Now you have given me a reason to call again. However it was always my belief that you could not own a short position in an IRA. And since an uncovered call could result in a short position how would they deal with the scenario where an exercise occurs and you do not own the shares? What would they do since you cannot have a short position? Would they let you short for a millisecond and then immediately cover it? And even then, is it legal to have a short position in an IRA even if it is only for a millisecond? I’m not sure that making the amount of time you have the position insignificantly short is the same as not having the position at all. Then the law would have to account for this. Does it?

        What I can do in my IRA accounts are as follows
        Buy a call
        Sell a covered call
        Buy or sell a put
        Open a combination option position that limits the losses to a fixed maximum.

        Every time do a search on short positions in IRA accounts all I find are articles saying that it is not allowed.

        Here is a quotation from such an article:

        “An additional limitation in an IRA account is the prohibition against short selling. Selling “naked calls” is similar to shorting the underlying and prohibited in IRAs. In a taxable account you can sell naked calls and just need to deal with margin requirements.”

        That said, it is perfectly legal to buy long a short ETF in an IRA account. However the decay associated with ETFs makes them less efficient than an actual short.

    • Here's why even fishing is not a good idea. Since exercises are assigned at random, the fact that you sold the call at 3:59 gives you no advantage over anyone else who is short the call. Furthermore, the other side of your trade is most likely a market maker whose COMPUTER is going to exercise before 4:20. Computers don't get sleepy.

      • 1 Reply to bstacy98406
      • I agree to a degree. But for me all this is pretty theoretical. All your assumptions seem reasonable however at some point or another I am going to test these theories with a single contract and see what happens in the real world. In all likelihood you are correct but "I just gots to know". Did he shoot five bullets or four? Maybe I will get lucky.

        A 44 magnum only holds five rounds in case you didn’t know. The cylinder needs the extra metal between rounds to be strong enough to handle the blast of a magnum round which is pretty high pressure.

        Have you ever shot a 44 magnum? I suggest you pass if anyone offers you the opportunity. It does to your hand what a 12 gage shot gun does to your shoulder. I did once and handed the gun back to the owner after one shot. I have a 40 caliber semi auto on back order but it is not a magnum round. It is my first 40 caliber so I have asked a few of my buds at work if the 40 caliber is painful to shoot and they assure me it is not. We shall see. We plan to go to the firing range as soon as I get it.

        We discuss these things at lunch time a few days a week in one of my coworker’s office behind closed doors which I fondly call the trilateral commission as there are three of us who are regulars. Here we talk about all kinds of politically incorrect topics of interest which we enjoy immensely. I have learned not to get on the topic of illegal aliens as you do not want to get these two guys started. They are both Hispanic but they hate the fact that Mexico is dumping all their poor people on us so they don’t have to deal with them anymore. Not that I disagree but I’m tired of discussing it. Besides, it’s depressing to think about something that seems to have no solution considering the fact the people here in the US won’t solve it because they refuse to even acknowledge what is actually going on. Which, by the way, is what they rag on about to no end. They think that Americans are pretty lame in this regard.

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