As interest rates (including mortgage rates) have slipped in recent weeks, so too has the share price of this attractive mortgage REIT fallen. It now trades at a significant discount to its last reported book value, and we believe this combination of events has set us up for a nice high-income-generating options trade. Specifically, we believe the trade described in this report is an attractive one to place today and potentially over the next few trading sessions, as long as the underlying share price doesn’t move too dramatically before then.
AGNC Investment Corp (AGNC), Yield: 8.9%
AGNC Investment Corp (AGNC) is a mortgage REIT that invests almost entirely in Agency mortgage-backed securities. Agency securities are basically backed by the US government (and the US government has consistently shown extremely strong interest in supporting this market), and for this reason AGNC is among the safest of mortgage REITs in this regard. We wrote a detailed report about AGNC earlier this year, and you can view that report here.
Here is a look at AGNC’s recent share price, price-to-book value, and interest rates (as measured by the 10-year US treasury).
The Trade:
Sell Put Options on AGNC with a strike price of $15 (~6.9% out of the money, it currently trades at ~$16.12), and an expiration date of August 20, 2021, and for a premium of at least $0.11 (or $11 because options contracts trade in lots of 100). This comes out to approximately 0.73% of extra income in 1-month—which may not sound like a big return—but it is significant for such a short time frame (it’s approximately 8.8% of extra income on an annualized basis, calculated as ($0.11/$15) x 12 months). And this trade not only generates attractive upfront premium income for us now, but it gives us a chance at buying shares of this attractive long-term mREIT at a significantly lower price ($15—the strike price) if the market price falls below $15 and the shares get put to us before this option contract expires in about 1 month. And we get to keep the upfront premium income no matter what.
Also important to note, you can adjust the strike price of this trade (for example to $16) depending on how badly (and at what price) you want the shares put to you, and to generate a different amount upfront income as shown in the table above). You can also consider the September contract as well.
Your Opportunity:
We believe this is an attractive trade to place today, and potentially over the next few trading days, as long as the price of AGNC doesn't move too dramatically before then and you’re able to generate enough premium income to your liking.
Our Thesis:
Our thesis is basically that we consider AGNC to be an attractive big-dividend investment that is now trading at an attractively-discounted price following volatility in mortgage rates in recent weeks. We already own some shares of AGNC in our Blue Harbinger Income Equity portfolio, and we wouldn’t mind more if they get put to us at the lower price of $15 per share. You can view our more detailed views and analysis of AGNC by using the link to our full report provided earlier in this article.
Important Trade Considerations:
Two important considerations when selling put options are ex-dividend dates and earnings announcements because they can both impact your trade. And in this case, both are big factors. First, AGNC will start trading ex-dividend on July 29th (2-weeks from today), and if the shares get put to you (and settled in your account) before then, then you receive the big dividend in addition to the attractive premium you generated on this trade. However, even without receiving the dividend, we view this trade as attractive.
Second, AGNC is expected to announce earnings on July 26th—before this options contract expires. The uncertainty of this earnings announcement adds uncertainty and volatility to this trade. However, we are comfortable with this uncertainty given the attractive premium income generated by the trade and because we like AGNC as a long-term investment, especially at its current price.
Conclusion:
AGNC is an attractive business. It borrows short-term money at a low interest rate, and then invests in higher interest rate agency backed securities with a longer duration. The recent decline in share price relative to last reported book value makes for an increasingly attractive entry point to buy shares of this big-dividend payer. However, if you are uncertain about near-term market volatility then the trade in this report gives you a way to generate attractive upfront premium income (that you get to put in your pocket and keep no matter what), plus it gives you a shot at picking up shares of this attractive business at an even lower price (if the shares fall below $15 and get put to you before this options contact expires next month). We already own some shares of AGNC (and we’re not selling), but if you are scared about near-term volatility, the trade in this article is an excellent way to consider playing it.