Markets

American Capital gets contrarian bet

One investor wants to profit from paranoia in American Capital Agency.

Implied volatility is much more expensive in the puts on the company, which invests in mortgage-backed securities. That is allowing one investor to place a cheap upside bet in the stock and stands to make money even if it declines slightly.

He or she sold 2,500 January 27 puts for $0.475 and bought an equal number of January 29 calls for $0.30. The trader collected an initial credit of $0.175 and will make further profits on the calls if AGNC rallies higher. The position won't lose any money as long as shares remain above $27 through expiration.

AGNC is off 0.14 percent to $28.84 in morning trading. The unusual thing about today's option trade is that the calls are cheaper than the puts, despite the calls being much closer to the money . Options are usually cheaper the further their strike price is from the value of the underlying stock. (See our Education section)

But there is a pricing anomaly in AGNC because implied volatility on the puts is 28 percent versus just 14 percent on the calls. That means investors are much more worried about the stock falling than rallying.

Today's option trade is designed to exploit that disparity, letting the investor earn potentially infinite profits from a contrarian bet.

More than 7,300 contracts have changed hands overall in the name so far today, which is about twice the average amount.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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