[Warning: volatility traders, greek-neutrals, etc probably don't want to read further. You might get upset.] I wound up having 1000 shares of stock put to me yesterday. My cost was 33.30 and the stock is now trading at 29+. In order to salvage something I was looking at Jan 07 LEAPS. I can sell the following (at today's prices - don't think they will change much tomorrow): 30/30 straddle for 9.15 35/35 straddle for 11.70 35/30 strangle for 7.90 I'm leaning toward the more conservative strangle. Also, since it's an MREIT, and the Fed announces in a couple of weeks, volatility might rise just before that, plus they have a hefty ex-div date coming up at the beginning of August. What to do?
I'd take the loss and move on. Thats a long time for the moving target to move. What happens if the feds raise rates a few times, and instead of 'soft landing' reports, we see some more drastic movements ? Furthermore, with fed funds rate likely going up, it seems inevitable to think there will be some more downward pressure on the reit sector. what specific security is it? what are their yields like? Do some calcs and find out how the stock price to dividend would move to compete with shorter term bonds/etc. Consider a hurricane or two through the summer with more inflation pressure, then fed reacting with more rate hikes, and you're done - probably a 10-20% drop in the underlying. How much does a 35/25 strangle sell for? probably $5.
You want to sell shorter-dated options, i.e. 1-to-3 months out, in order to benefit from time & volatility decay. January wouldn't be a good choice. Maybe the CME Miami Real Estate contract might be a decent correlated hedge. Check it out.
The underlying is NFI. They currently pay 5.60/year dividend. At PPS $30 that's over 18%. If someone wants to pay me 7.90 to buy it at 30, my cost would be 22.10. Then the current divvy would be more like 25% for the new shares. I think the market would keep the PPS above that just because of the dividend. If they pay a $2 special divvy like many people are speculating, and they have done before, that would be over 34%.
pretty amazing yield.. not a run of the mill reit. not a bad stock to be put onto you. but thinking about that, i could only imagine that higher short term interest rates are going (probably already) to put a lot of downward pressure on their new business. i wish i would have know about this stock 2 years ago.
Yeah the shorties have hit this one pretty hard. They keep arguing that the divvy has to run dry one of these days, but so far it hasn't. Company says the 5.60 divvy is already in the bank for 2006, and they are working on 2007. They have been doing pretty well the last couple of years with rising interest rates.