The last article I wrote on American Capital Agency (AGNC) was on May 3rd. At that time I was bullish on the stock and there were a number of reasons. I was certain that single family mortgage rates would continue higher and the company would continue to make good money. And secondly, it had very strong bullish tendencies and I always like creating a short term income play in a strong trend. Well how did I do exiting today, Wednesday June 6th?
The original Bull Call Spread looked like this:
The Option Play
- Buy a June 2012 call with a '32' strike (priced at $0.24)
- Sell a June 2012 call with a '33' strike (priced at $0.06)
- Net Debit to Start: $0.18
- Maximum Profit: $0.82
(click to enlarge)
I reversed the trade today and it looked like this: (presently trading at 32.85)
- Sold the June 2012 call with a '32' strike (priced at $0.86)
- Bought back the June 2012 call with a '33' strike (priced at $0.16)
- Profit on the buy back: ($0.86 - $0.16)= $0.70
- Subtract initial debit: ($0.70 - $0.18)= $0.52 profit
- ROI: 288%
Wouldn't it be nice if all trades went this well!
I believe the REITs will continue to do well. Consumers will continue to take advantage of record low mortgage rates. Have you seen the Vanguard REIT ETF (VNQ)? It tracks the performance of an index that measures the performance of publicly traded equity REITs -- is up nearly 10 percent this year. So far this year, the S&P Case-Shiller composite index of 20 metropolitan areas gained 0.1 percent in March, just shy of economists' forecasts of 0.2 percent. There were price increases in seven of the twenty cities covered.
This is just one example of how a savvy investor can take advantage of a short term income opportunity on stocks that also may be held long term. If you are looking for more trade ideas, I believe this stock will continue to perform well and there is no reason we cannot explore the possibility of another Bull Call Spread. The stock is presently trading at $31.13.
The Options Play
- Buy a September 2012 call with a strike of '33' (ITM) (priced at $0.55)
- Sell a September 2012 call with a strike of '34' (priced at $0.14)
- Net Debit to Start: $0.39
- Maximum Profit: $0.61
This three month period gives us enough protection from time decay for our trade to transpire.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
