I deployed some cash.

music selection:  “Cuts You Up” — Peter Murphy

I have been raising cash and should have another 37,000 in the main trading account Monday.  I went ahead and deployed about 10k into a dividend stock.  I chose Annaly Capital Management (NLY).  This is not a growth name and is purely a dividend play.  The underlying yields 9.89%.  There is also an opportunity to juice returns by selling covered calls.

I bought 1,100 shares at 8.91 and sold 11 calls at the 9 strike and 16APR2021 expiry.  Odds of being called away are about even.  That would result in an additional 9 cents earned as capital gains.  Should shares not be called away, my annualized return on the calls would be 12.59%.  If shares are called, I will write puts at 9 to try to get back in while producing income.  The ideal situation is NLY lingers in the high 8 dollar range for years and I earn the options yield plus collect the underlying distribution. That would be good for about 20% annualized return.  Warren Buffet level performance!

Devour your prey raptors!

Annaly Capital Management buy/write with yield up to 12.59%

Never miss another opportunity to devour prey!

2 thoughts on “Annaly Capital Management buy/write with yield up to 12.59%

  • March 30, 2021 at 7:27 pm
    Permalink

    I’ve thought about this play many times before. The rabid housing market and stimmie checks should keep defaults low for a while, and slightly higher interest rates might actually help NLY due to fewer refinances.

    The thing that always made me back off was the sense that coastal/urban areas are in a bubble – well beyond any measure of affordability – and due for one of their once-every-dozen-years corrections. Also, if interest rates rise beyond a certain point, NLY’s margins on borrowing short-term and lending at the 30 year term will be severely squeezed. In that same scenario, housing prices would fall and defaults would go up.

    Overall, it’s a bold bet that interest rates stay low – but so is the rest of our portfolios!

    Reply
    • March 30, 2021 at 7:46 pm
      Permalink

      Interest rate risk for NLY is real. They have an experienced management team that has been through the interest rate cycle before, and I think they can navigate it better than most. Default risk is very low because 92% of the mortgage value on their books is in “agency” notes. That is, the GSEs Freddie and Fannie guarantee the principal through mortgage insurance. A 50% default rate on the remaining 8% would presumably put NLY in the rental real estate management business for a time while they work to securetize the assets and find a buyer (or spin it off to shareholders burdened with a fat slug of the associated debt.) But not put them in bond default.

      The affordability issue is somewhat hedged by the GSEs as there is a maximum home value eligible for GSE sponsorship. Else, your loan is “jumbo” and requires a larger down payment and therefore wouldn’t be on NLY’s radar for investment

      Thanks for reading Chris!

      Reply

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