The following article was sent to subscribers when they could cross the bid-ask spread both ways and still make it work.
Right now (from publication time) there is a bid for a few thousand shares of NLY-C running around $24.75 to $24.79. The ask on NLY-E for a few thousand shares is $24.60. These two preferred shares are interchangeable with the exception that NLY-E has a slightly longer call maturity. Dividend payments are the same amount and on the same day. Trade is viable, I tested it. Just dumped all my NLY-C and picked up shares of NLY-E at the discount.
NLY-C is now out of the light green "buy" zone. NLY-E is still within it by a small amount.
Since NLY-E is only slightly within the buy zone, this isn't an alert for "Grab NLY-E right away if you have no position." Instead, this is "If you followed me into NLY-C, this is the ideal time to jump ships to NLY-E."
That was a pretty short piece, but it worked for identifying the trade on the preferred shares of Annaly Capital Management (NYSE:NLY). Within a few minutes, thousands of shares moved hands and the opportunity was closed. It reopened a couple times within the last two weeks.
As of the end of trading on 03/17/2017, the last transaction prices were only a few cents apart. However, when the trade was available there was occasionally room to move quite a few thousand shares.
The reason to make this trade when it exists has little to do with the call protection for NLY-E and everything to do with the difference in prices. The investor was effectively creating their own special dividend of $0.15 to $0.19 per share. For each thousand shares it was $150 to $190. The portfolio continues to provide exactly the same income because both NLY-C and NLY-E carry a coupon rate of 7.63% (rounded from the same number).
How to Find It
If you have some NLY-C (which may be getting extra demand from some index funds) you would like to dump in favor of NLY-E, simply watch the bid for NLY-C and the ask for NLY-E. When the bid on NLY-C is above the ask on NLY-E, the trade produces immediate cash flows. When the spread reaches $0.15 to $0.19, it becomes an excellent opportunity to take some easy gains.
I don't know about you, but that is my favorite way to make money online. Same underlying company. Same priority of dividends. Just a simple market failure paying investors to correct it.
If the investor wants to reinvest that special dividend immediately, it would've brought their yield up from 7.69% to 7.75%.
Check Again in 3 Weeks
By virtue of publishing this publicly, it may draw so much money into the trade that it kills the opportunity to clear more than a couple cents for a few weeks. Make a note to check back on this as we get into April and it may exist again.
On top of the normal disclosure attached to the article, I want to point out that I'm long on NLY-D and NLY-E. NLY-E is nearing my price targets and if it got into a rally it could trigger the limit-sell orders I often keep active on preferred shares.
Markets are expected to be at least moderately efficient, but sometimes poor liquidity between tickers creates a nice failure. Watch the different series of preferred shares and you may find some incredible opportunities develop.
If you want to learn more about investing in high yield instruments, specifically mortgage REITs and their preferred shares, check out the reviews from my subscribers. In the last month I was able to correctly call the opportunity in shorting Orchid Island Capital (NYSE:ORC) (about a 20% return), shorting Western Asset Mortgage Capital (NYSE:WMC) (for a 6% to 7% return) which included a release when shares hit the target range to close the trade, and buying Resource Capital Corporation (NYSE:RSO) (up over 17% in a week) going into the earnings release.
Disclosure: I am/we are long RSO.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Long NLY-D and NLY-E. I often keep open limit-sell orders above my estimated price targets. I have some of those open currently, so a price spike on NLY-E could trigger the orders. No financial advice. Do your own due diligence.