No Stress Options Trade

Here is a trade I just put on in my personal account.

The stock is NLY. The trade is a simple Put credit spread

Sell to Open Oct 16 Puts (.40)

Buy To Open Oct 15 Puts (.26) for a credit of .14 cents per spread.

Trade has a 74% probability of success. And can make 16.2% if left to expiration.

NLY is a financial company but a very boring stock. I love owning this one as well because it pays a little over 10% dividend right now.

Options Trading Commissions

So here is how the trade works: If NLY is above 16 on expiration day (right now it is trading at 17.68) I make the whole 16.2% minus whatever commissions I paid to get into the trade. If NLY is below 16 and above 15 I will be assigned the stock if I don’t exit the trade. Again, I don’t mind owning this stock. if NLy is below 15, I lose the entire amount that I can risk, which is $86 per spread, plus the commisisons I paid unless I exit the trade.

Here’s the cool part. This is a chart of the stock. The red line is the breakeven on the trade. NLY has to be below that line for my to lose money. Guess what? It has not been that low in MONTHS!

NLY Stock Chart

Calendar Call Spread

But wait! It gets better. I plan on adding a call spread as well. Selling the 19 stirke and buying the 20. Notice that the stock has not been above 19 in months either. So even though the probability of profit is listed as 74%, I feel it is a lot more than that.



  1. Tom on September 12, 2011 at 1:54 pm

    I hope this spread works out…I could use the income!

    • Genius on September 13, 2011 at 10:09 am

      yeah, me too

  2. audreyf on September 12, 2011 at 1:58 pm


  3. audreyf on September 12, 2011 at 3:04 pm

    also where do I go to see any changes in this trade since it is not in the members trades?

    • Genius on September 13, 2011 at 9:59 am

      Audrey, this is not an official OG portfolio trade so it is not on the site and I did not list how many contract to use. You will have to decide for yourself how much of a risk you want to take if you decide to trade this will real money.

      As for adjustments, I dont think we will need any, but I think a safe plan would be to exit if the trade is negative 15%. or about the same as the credit you got.

  4. Sherm on September 12, 2011 at 4:35 pm


    Love this trade, it’s one that I’m doing myself! I picked up some NLY during the recent volatility and love the higher premiums I’m finally getting on calls and puts. For interested parties, NLY’s book is like, $16.55 with secondaries recently at $17.70 and $17.90. Everytime it pops above 1.1x book value, they do a secondary and knock the price back down.

    As an aside Allen, take a look at AGNC. Similar expansive yield, and better premiums on the options. I’m basically doing the same thing with the 27/25 put spread; the upside calls are not so easy. AGNC has a book of $26.76 with secondary behavior and valuation characteristics similar to NLY.

    Also, I like to trade these two around ex-div time; both tend to jump to highs in the week or two before they go ex-div, and then drop below the dividend adjustment in the first or second week after; NLY’s more reliable. I’ve found that I can squeeze some extra juice from the trade in return for a month of keeping an eye on them.


    • Genius on September 13, 2011 at 10:09 am

      Thanks for the info Sherm!
      NLY usually does not offer such nice premiums, but with the high volatility lately it makes the trades very lucrative. I have also started playing with NLY as a channeling stock. I did not know they kept knocking the price down on purpose, now it makes sense. I have sell orders in at about $18.25 and but orders in at $16.5 so as long as it channels I will keep buying and selling.

      Will take a look at AGNC. Never heard of that one. Thanks!

  5. TOM SEMERARRO on September 12, 2011 at 9:24 pm

    Looking at the nly call spread the oct 19 call is @ .07
    and the oct 20 is at .02 is that correct??

  6. may siu on September 13, 2011 at 7:11 am

    This is the credit spread , I would like watch and learn more from your recommendations.

  7. Dennis on September 16, 2011 at 9:14 am

    I just looked at the AGNC that Sherm mentions. It looks interesting but noticed that on the Oct options the IV’s between the calls and puts are way different from each other at any strike price. I’ve never seen this. Is this significant of something?

    • Genius on September 16, 2011 at 11:00 am


      Yeah that is weird. The IV of the PUTS is much higher than that of the CALLS. I think that means the market makers are pricing the PUTS at a premium to the CALLS because there is not much chance of this stock going higher but a VERY GOOD chance of this stock sinking. I don’t know enough about this stock to comment but it might have to do with all this banking stuff giong on – new regulations, not enough capitalization, etc.

      The same thing is happening in NLY but not as bad.

      • Sherm on September 21, 2011 at 8:15 pm

        Hi guys, pardon me if I chime in here, albeit a bit belatedly. The IV is high on puts because we’re coming up on ex-dividend date for AGNC(when you wrote your comment). It has since passed. Since a holder of the stock would receive $1.40, puts are priced so that you don’t get a free ride; sell an Oct put for $30, have the price drop by $1.40 when it goes ex-div, and bingo an extra $1.40, free money. No such thing – put prices are adjusted for the cash return of the dividend. NLY’s dividend is $.60, and ex-dividend is Sep 27 (or 28?), so the IV is proportionally smaller.

        HOWEVER, the strategy I’ve found works best with these is to buy calls after ex-div and sell puts, because the price usually over-corrects to the downside. Then in the typical over-run leading into ex-div, sell your calls and buy puts. That’s the asymetric entry into the spread that I was mentioning earlier that you have to keep an eye on – one leg before, the other a week or two later.


        • Sherm on September 30, 2011 at 2:51 pm

          At the risk of looking silly replying to myself, anybody who is considering this trade should look at the end of day action in NLY of late. Barring a Euro meltdown, looks like 16.60-ish is the low for NLY…

          • Genius on October 3, 2011 at 9:33 am

            I looked at this trade right after the dividend was paid to see if I could add to my position but the premium was sucked out. Seems like a trade we would have to get into about 40 days to expiration to make the same nice return.

  8. robert on September 18, 2011 at 11:28 am

    How do you calculate the probability of a spread?

    • Genius on September 19, 2011 at 10:37 am

      You can do it by looking at the delta of the short option. Or take the lazy way and let your broker’s software tell you what it is. There are many different formulas people use.
      The quick and dirty way is to look at the delta of the short option. Let’s say the delta is .10 – that means this option has a 10% chance of expiring in the money. Or the trade has a 90% chance of expiring worthless. This is for a simple vertical spread. When you add other options, it gets more complicated.

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