Agnc call spread, is the risk reward good?

[spindr0]

Quote from optionnew:

... in that case I plan the following, Exercise my 25 option before ex dividend, get the 1.40 dividend, next day sell the stock & buy the 25 call again for reduced price. In that case my cost will be reduced even more by the dividend, and my max risk (besides the 1 day I own the stock) will stay by 2.85 or less..
Make sense?

Dividends are payment to you with your own money so they're not going to lower your cost by a penny. They're not a yours (a profit) until the stock rises by that amount.

IOW, you get $1.40 dividend but the stock that you bot via exercise of your Jan 25c is now reduced by $1.40 and selling it books that loss. Then you buy back the original call and you''re back in the original position with a realized $1.40 loss and the same call that cost you $1.40 less. All you've achieved is slippage and a bunch of commissions.

 

[optionnew]

Quote from spindr0:

Dividends are payment to you with your own money so they're not going to lower your cost by a penny. They're not a yours (a profit) until the stock rises by that amount.

IOW, you get $1.40 dividend but the stock that you bot via exercise of your Jan 25c is now reduced by $1.40 and selling it books that loss. Then you buy back the original call and you''re back in the original position with a realized $1.40 loss and the same call that cost you $1.40 less. All you've achieved is slippage and a bunch of commissions.

The diffrence is that for the short 29 Dec call, 'dividends' does not count..
So 2.85 is net cost for my 25 call (3.35-.50= 2.85). When I exercise the 25 call my total cost for stock is 27.85 ($25+2.85), and the stock is trading for 29.50.
Next day I get the dividend the stock is falling 1.40 to 28.10 so I sell the stock & lock in a 'profit' of 1.65.
I then go & buy back the $25 call for 3.30-3.40 (20-30¢ time premium for ditm call). Now my net amount at risk is only 1.7, should the stock be higher then 29 in Dec I would earn an additional .60 to .70, or roll again, all of that with limited downside risk. What's wrong with that?

 

[donnap]

Quote from optionnew:

The diffrence is that for the short 29 Dec call, 'dividends' does not count..
So 2.85 is net cost for my 25 call (3.35-.50= 2.85). When I exercise the 25 call my total cost for stock is 27.85 ($25+2.85), and the stock is trading for 29.50.
Next day I get the dividend the stock is falling 1.40 to 28.10 so I sell the stock & lock in a 'profit' of 1.65.
I then go & buy back the $25 call for 3.30-3.40 (20-30¢ time premium for ditm call). Now my net amount at risk is only 1.7, should the stock be higher then 29 in Dec I would earn an additional .60 to .70, or roll again, all of that with limited downside risk. What's wrong with that?

It depends on where it trades ex-div. Especially with larger divs there's no guarantee where it will go.

You seem to have it planned out well enough, but be prepared for surprises. These things don't always go the way we think they should.

It could go in your favor - or not. Also, these options don't appear to be particularly liquid. You may have trouble repurchasing the call at a reasonable price.

 

[spindr0]

Quote from optionnew:

The diffrence is that for the short 29 Dec call, 'dividends' does not count..
So 2.85 is net cost for my 25 call (3.35-.50= 2.85). When I exercise the 25 call my total cost for stock is 27.85 ($25+2.85), and the stock is trading for 29.50.
Next day I get the dividend the stock is falling 1.40 to 28.10 so I sell the stock & lock in a 'profit' of 1.65.
I then go & buy back the $25 call for 3.30-3.40 (20-30¢ time premium for ditm call). Now my net amount at risk is only 1.7, should the stock be higher then 29 in Dec I would earn an additional .60 to .70, or roll again, all of that with limited downside risk. What's wrong with that?

Capturing the dividend, closing the position and reopening it does not alter the risk/reward of the position. Based on your estimate of the call's post ex-div TP, it modestly lowers your profitability. In addition, you now have a taxable event from the dividend, some add'l B/A slippage and a bunch of extra commissions. What's wrong with that? You've "un-improved" your position.

 

[newwurldmn]

You have done a buywrite with extra operational risk.

You need to exercise your Jan13 before expiry to not lose the dividend (you won't make any money here) and either the Dec will be exercised against you (which is good) or it won't (also good if the ex dividend stock doesn't sell off more than the premium)

You have the same payout as a buywrite, with two exceptions:

1. you paid a lot more in commissions and bid/offer on the Jan13.

2. You have the operational risk of you or your broker messing up the early exercise.

Benefits to position
1. You have protection that if there is a market calamity before Sep 23rd, you will be protected (as this company is extremely levered and sensitive to stress in the Repo market)
2. Less capital usage until Dividend ex-date

 

[optionnew]

Quote from newwurldmn:

You have done a buywrite with extra operational risk.

You need to exercise your Jan13 before expiry to not lose the dividend (you won't make any money here) and either the Dec will be exercised against you (which is good) or it won't (also good if the ex dividend stock doesn't sell off more than the premium)

You have the same payout as a buywrite, with two exceptions:

1. you paid a lot more in commissions and bid/offer on the Jan13.

2. You have the operational risk of you or your broker messing up the early exercise.

Benefits to position
1. You have protection that if there is a market calamity before Sep 23rd, you will be protected (as this company is extremely levered and sensitive to stress in the Repo market)
2. Less capital usage until Dividend ex-date

Very good anelysis indeed. I am giving up some profits because of points 1 and 2, however I am cutting my risk expousure 'drmamtically' with points 3 and 4. As mentioned I only plan to hold the stock for 1 day, so my risk stays limited, from a risk-reward prospective it makes a lot of sense to me.

 

[newwurldmn]

Quote from optionnew:

Very good anelysis indeed. I am giving up some profits because of points 1 and 2, however I am cutting my risk expousure 'drmamtically' with points 3 and 4. As mentioned I only plan to hold the stock for 1 day, so my risk stays limited, from a risk-reward prospective it makes a lot of sense to me.

You are really taking some kind of delta view for 1 day around the dividend. For this you are paying a lot in bid/offer. The protection with regards to the repo risk make sense to me. The operational risk is pretty high. If you were to get assigned on the dec calls you would make far more money if you didn't have them in the first place. Better strategy would have been to buy the Oct calls and not trade the dec calls. It's cleaner, you could have spent less capital for the same trade.

 

[optionnew]

Quote from newwurldmn:

You are really taking some kind of delta view for 1 day around the dividend. For this you are paying a lot in bid/offer. The protection with regards to the repo risk make sense to me. The operational risk is pretty high. If you were to get assigned on the dec calls you would make far more money if you didn't have them in the first place. Better strategy would have been to buy the Oct calls and not trade the dec calls. It's cleaner, you could have spent less capital for the same trade.

Don't see a lot of risk here besides the 1 day I will own the stock. Yes, I pay for bid/ask, but so what. As long as my risk is limited I'm happy with 20% return.

 

[spindr0]

Quote from optionnew:

Don't see a lot of risk here besides the 1 day I will own the stock. Yes, I pay for bid/ask, but so what. As long as my risk is limited I'm happy with 20% return.

Ergo, that's why if you like the position, you leave it as is. Exercising and rebuying costs slippage and add'l commissions and adds overnight risk since the open may be lower. What are you gaining in return for that? Zilch.

OTOH, the AM open could be higher and thru dumb luck, you do better. But that's not what spreads are about.

 

[newwurldmn]

Quote from optionnew:

Don't see a lot of risk here besides the 1 day I will own the stock. Yes, I pay for bid/ask, but so what. As long as my risk is limited I'm happy with 20% return.

It's a fine strategy if you have a view that the stock will rally from now to that one day.

If you have this view, I wouldn't have the callspread. The risk is operational and the bid/offer you pay but that can be minor. Personally I would have done the october calls outright as they require less premium and will be more liquid, and better, I would just buy the stock.

If you don't have a view that the stock will rally ex-dividend date then you don't really have any reason to have any position.

The callspread only makes sense if you think the stock ex-dividend will have a muted rally and at that all the way to december.

Techincally it's not a 20% return as you will need cash to buy the stock when you exercise.