Annaly poised to profit from looming Fed Cuts
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I had previously posed the question - “Time to buy financials?” Over the weekend I sorted through the subprime articles. Unlike the TV commercial I did not finish the internet reading all articles. What I did sort through was what I believe will be a good play on continuing interest rate cuts by the Fed as this whole subprime drama unfolds.
The stock is Annaly Capital Management (NLY). The company’s credit risk is practically absent due to its portfoliio primarily consisting of agency securities. Per newratings.com - “Annaly Capital Management is well positioned to benefit from recent as well as future reductions in the interest rate by the Federal Reserve, the analysts say. The company is significantly insulated against the risk of a recession in the US, Stifel Nicolaus & Company adds.”
Since NLY makes its money on the interest rate spread Fed cuts bode well for this company. It has been grouped in with the other subprime victims and shouldn’t be. Its earnings will tell the tale and separate this stock from the pack. I believe it will be one of the best stocks for 2008 and should avoid all the problems in the current economy. All this with a juicy yield of 7.3% make this too difficult to pass up.
I do not own a position yet, but I am going to be buying Jan ‘09 $22.50 calls under $1.00.
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What’s the pros and cons of buying an option that far out compared to buying a Jan 08?
Trying to learn bits and pieces about options.
Dan -
For one the Jan 08 option expires in 3 days! With options, what you pay is your premium. The premium is really summed up by 2 factors. One is the time. For longer options you are buying time more so than anything else. The second facor is how far in/out of the money the option is.
I usually go for a longer option when I am confident in its long-term movement vs its short-term movement. If I bought for example a Feb Call and there is some minor event that causes a blip overall in the market, my call may lose tremendous value. After all your option looks at the probability that it will end in the money. If 10 days before it expires, it goes down 25% what do you think the odds are in the next 10 days it will be in the money? Your option experiences time decay, meaning you have less time for your stock to move. The closer it gets to expiration, all your time value in your option is gone. The bet here is that the other component the movement of the stock price will be enough to offset your time decay.
With a short option the time decay is very rapid as it approaches expiration. Shorter term options also offer big movements both up/down if there is significant development in your stock.
You might want to read my blog post about LEAPS vs Stocks. A Leap is a long-term option…. http://www.daxdesai.com/2007/05/22/why-buy-call-leap-options-instead-of-stocks/
Awesome, thanks for the clarification. I’m reading your other blog post.
The recession side of things would be one of my biggest fears with any investment/trade at the moment, especially with recessions both looming in US and UK (and indeed global economies). I also don’t believe any company can be completely insulated against the risk of a recession and the next few months could get very interesting.
Dax, did you complete your trade? I think the financials have bottomed now and anyone with some guts to pick through the ruins will do really well
Recession is just a cycle and it eventually ends. Problem is that normally we do not know we are in recession until it is almost over. And I think we have been in a recession for some time now and now is the time to commit
Dear Dax
Do you still believe Annaly Capital stock will respond favorably to a Fed cut? And if so, how large a cut?
Dear Dax
How much of a Fed cut will be necessary to take Annaly stock northward?
Kimberly - Yes I still believe it will respond positively. Any cut above 50 basis point should propel it to near $19 range.
Also encouraging is that many insiders have been exercising stock options over the last several weeks to buy the stock. Three of the transactions have occurred since March 7, 2008, the last being a director purchase of 8,500 shares yesterday. Contrast this with Bear Stearns where insiders were dumping their shares.
Kimberly - Yes I still believe it will respond positively. Any cut above 50 basis point should propel it to near $19 range.
Also encouraging is that many insiders have been exercising stock options over the last several weeks to buy the stock. Three of the transactions have occurred since March 7, 2008, the last being a director purchase of 8,500 shares yesterday. Contrast this with Bear Stearns where insiders were dumping their shares.
Thanks Kimberley for posting- You reminded me about Annaly and I picked up 6 Sep 08 $17.50 contracts @ .90 each. Time will tell, but now I have skin in the game to backup my comments.