Only individuals who are bullish on American Capital Agency (AGNC) should consider employing this strategy. If you are not bullish on this stock, then it would be in your interest to look for alternative plays.
Reasons to like American Capital Agency :
- By investing exclusively in fixed rate agency securities that are implicitly guaranteed by the US government, its credit risk is limited.
- AGNC uses swaptions to protect itself against lower interest rates that might lead to early prepayment.
- An excellent yield of 15.3%
- A strong quarterly revenue growth rate of 362%
- Profit margins of 92%
- A good five year ROE average of 18%
- An excellent quarterly earnings growth rate of 378%
- Projected year over year growth rate for 2012 of 10.89%
- Net income soared from $119 million in 2009 to $770 million in 2011
- A strong relative strength score of 74 out of a possible 100
- A good interest coverage ratio of 7.00
- $100K invested since its inception would have grown to over $261K; if the dividends were reinvested the rate of return would be much higher.
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American Capital Agency held up remarkably well during the correction and is already trading at a new 52-week high. However, as the markets are still in a volatile phase, there is a chance that they could test their lows again before trending upwards. If they test their lows, it could trade down to the $30-$31 ranges again. This play has two parts to it. The first part entails the selling of a put, and the second part entails the purchase of a call with the proceeds from the sale of the put.
The Jan 2013, 30 puts are trading in the 1.75-1.92 ranges. If the stock pulls back to the 30-31 ranges, these options should at least rise in price by 75 cents. For this example, we will assume that the options can be sold for 2.50 if the stock pulls back to the stated ranges. For each contract sold, $250 will be deposited in your account. If you are bullish on the stock at current levels, you could sell the Jan 2013 puts at the current price.
The Jan 2013, 34 calls are currently trading in the 0.25-0.41 ranges and if the stock pulls back to the stated ranges, one should be able to purchase them in the 15-20 cents ranges. For this example, we will assume that we can purchase the calls for 20 cents each if the stock pulls back to the 30-31 ranges. For each put sold one could purchase up to 12 calls and still have $10 to spare. If the stock takes off and trades past $35, these calls could reward the holder very handsomely.
If the stock trades below the strike price that the puts were sold at, the shares could be assigned to your account. However, as you were bullish on the stock to begin with this should not be a problem as you will be getting in at a lower price. Depending on how many calls you purchased, your final cost if the shares are assigned to your account will range from $27.70 (if you purchased only one call for $20) to 29.90 (if you purchased 12 calls).
For investors looking for other ideasm detailed data has been provided on one additional company - Williams Companies Inc. Our latest article could also prove to be a source of some new ideas, Chesapeake Energy Bears And Bulls: Leverage Your Position for free.
Company: Williams Companies Inc (WMB)
- Net Income ($mil) 12/2011 = 376
- Net Income ($mil) 12/2010 = -1097
- Net Income ($mil) 12/2009 = 285
- EBITDA ($mil) 12/2011 = 3441
- EBITDA ($mil) 12/2010 = 2532
- EBITDA ($mil) 12/2009 = 2657
- Cash Flow ($/share) 12/2011 = 4.07
- Cash Flow ($/share) 12/2010 = 3.96
- Cash Flow ($/share) 12/2009 = 3.54
- Sales ($mil) 12/2011 = 7930
- Sales ($mil) 12/2010 = 6638
- Sales ($mil) 12/2009 = 5278
- Annual EPS before NRI 12/2007 = 1.75
- Annual EPS before NRI 12/2008 = 2.15
- Annual EPS before NRI 12/2009 = 0.94
- Annual EPS before NRI 12/2010 = 1.28
- Annual EPS before NRI 12/2011 = 1.23
- Dividend Yield = 4.10
- Dividend Yield 5 Year Average = 2.60
- Dividend 5 year Growth = 15.15
- Payout Ratio = 1.14
- Payout Ratio 5 Year Average = 0.38
- EP5 Year History EPS Growth = -5.58
- ROE 5 Year Average = 11.51
- Current Ratio = 1.40
- Current Ratio 5 Year Average = 1.31
- Quick Ratio = 1.10
- Cash Ratio = 0.65
- Interest Coverage = 3.3
This strategy provides one with the potential to truly leverage one's position to the hilt without having to pay for it. One could purchase up to 12 calls for each put sold if the stock trades down to the suggested ranges. Even at the current price, individuals would be able to purchase six or more calls for each put sold if they were willing to work the option. This strategy should only be employed by those who are bullish on this stock, for there is a chance that the shares could be assigned to your account if they trade below the strike price the puts were sold at. Investors willing to take on a bit more risk might find this article to be of interest: Alpha Natural Resources Vs. Arch Coal: Is There A Clear Winner.
EPS and Price Vs industry charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Earning and growth estimate's data sourced from dailyfinance.com. Option tables sourced from yahoofinance.com.
Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies - let the buyer beware.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.