Options On Strangely-Acting Stocks
Rule: After you fully understand Black-Scholes, Calls Puts, spreads, Butterflies, etc., go on to find
exceptions where the future does not follow the Black-Scholes predictions and therefore you may make
money from those blindly following what they think are "the rules".
Example is the action of the Agency REITs such as AGNC.
On October 11, 2010 I noted the following gains:
AGNC DEC $25 CAL +25%
AGNC DEC $27.5 CAL +33%
These gains are from the purchase of those stocks and options on 9/30/2010.
Black-Scholes doesn't compensate for the specific date of the dividend in the case of AGNC given the way it
is implemented at brokers such as E*Trade.
Rule 2 for AGNC: If they have a secondary offering just before the dividend is declared, the stock price will
dive but quickly recover.
Chart of such an event in December 2010 where I show it in terms of the DEC 27.5 CAL:
Here it is again in terms of the JAN 30 PUT price: