I was being interviewed yesterday and we were discussing earnings and I noticed AGNC reported yesterday and they are an old favorite of ours – a Mortgage REIT that pays a $1.44 (17.65%) dividend and is priced at book value at $8.25. Earnings were 10% over consensus (0.44). Declining rates are a positive for them and the Fed should be lowering rates EVENTUALLY and here’s the way we’ll play it for our Income Portfolio:Â
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- Buy 3000 shares of AGNC at $8.25 ($24,750)
- Sell 30 AGNC 2027 $8 calls for 0.85 ($2,550)Â
- Sell 30 AGNC 2027 $8 puts for $1.80 ($5,400)Â
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That’s net $16,800 or $5.60 per share, which is a 32% discount to the current price. Our plan is to get called away at $8+ in Jan 2027, collecting $24,000 (we are limited and protected by the short calls) for a $7,200 profit but also collecting 7 0.36 dividends x 3,000 shares = $7,560 for a total profit of $14,760 (87.8%) in 21 months.
If AGNC is below $8 in Jan 2027, we would be assigned 3,000 more shares at $8 ($24,000), leaving us with 6,000 shares at $40,800 less the $7,560 in dividends we collected = net $33,240/6,000 = $5.54 per share – still 33% less than the current price. That’s our WORST case (unless they cut the dividend)! Â
When your worst case sounds good – make the trade! Â
PHM just announced earnings this morning and they were just fine and guidance was maintained at $2.35Bn for the year yet you can buy the whole company and all their land for $18.7Bn so they are trading at a RIDICULOUS 8 time current earnings – despite the challenging environment (they made $3Bn last year!). Â
They don’t pay much of a dividend, so there’s no point in owning the stock but we can promise to own it at a discount by selling puts and then we can put that money towards a bull call spread for our Long-Term Portfolio (LTP) as follows: Â
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- Sell 10 PHM 2027 $75 puts for $8 ($8,000)Â
- Buy 20 PHM 2027 $90 calls for $23 ($46,000)Â
- Sell 20 PHM 2027 $115 calls for $13 ($26,000)
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That’s net $12,000 on the $50,000 spread that’s $10,000 in the money to start.
