Latest stock Buy:100 shares of NRZ (For Speculation in Options Market)

Updated: 11 April, 2020 seen 83
NRZ option trading Ratio Back Spreads Trading

On April 9, 2020, I bought 100 shares of New Residential Investment Corp (NRZ) paying $5.75 per share.

This time I bought it not for dividends, but for speculation in the options market. 

Let me explain, NRZ has been on fire lately a lot - tanking from above $16 in December 2019, to little more than $3 in March 2020.

I have been buying and holding NRZ since late 2018. NRZ has been the top corner dividend payer for our dividend income in the following months - January, April, July, and October.

NRZ trading price as of April 9, 2020

NRZ trading price as of April 9, 2020

With markets tanked, NRZ decided to slash their dividend from $0.5 quarterly to $0.05 quarterly (that's a 90% dividend trim)

With its quarterly dividend payout of 0.05 dollars per share, this latest buy has a dividend yield of 3.4% and will pay us $5 (before tax) every quarter. Not the biggest dollar amount, but still acceptable

Before this buy, my average cost for one NRZ stock was $10.18, after adding 100 shares at $5.75, the cost basis went down to $8.78. 

Now I could sit my ass and do nothing, and hope for the stock to recover and maybe go back to the pre-crash levels of $15-$16 per share. Sure, this is an option. But I decided to do a little gamble with call ratio back spreads (options trading)​

here is my trade setup

  • Sold 1 call NRZ 5 Apr 17'20 @ 1.04
  • Bought 2 calls NRZ 7 Apr 17'20 @ 0.27

I managed to get a small premium of $42.80 from this setup, in case  NRZ trades bellow my strike price of 5, I keep the premium

Here are possible scenarios what can happen next with NRZ

  1. On the expiry day (April 17, 2020) NRZ trades below the strike price of 5 - very well, options expire worthlessly, I keep premium and shares. 
  2. On the expiry day, NRZ trades in the range $5 - $7 per share, my shares of 100 NRZ gets called away. 
  3. NRZ trades above the strike price of 7 - very well - I start making additional income, second bought call will do the job and pump money. This is the scenario I'm looking for.

Additionally, I sold a put ratio back spread with the same expiry

  • Sold 1 put NRZ 6 Apr 17'20 @ 0.73
  • Bought 2 puts  NRZ 4 Apr 17'20 @ 0.14

From this trade setup, I got an additional premium of $37.80

Here are possible scenarios what can happen next with NRZ

  1. On the expiry day (April 17, 2020) NRZ trades above the strike price of 6 - very well, options expire worthlessly, I keep premium
  2. On the expiry day, NRZ trades in the range of $6 - $4 per share, I get assigned 100 shares of NRZ at $6 per share.
  3. NRZ trades below the strike price of 4 - very well - I start making additional income, second bought pump will do the job and pump money. 

For put options, I'm looking them to expire worthlessly (1), but in case NRZ keeps crashing again, scenario 3 will help. And actually I don't mind taking the assignment. All options are good

What is really interesting, if NRZ ends trading in between 5 and 6 strikes on expiry dates, I will be both obligated to sell and buy the meantime.

Sell at 5 and buy at 6

To avoid such scenario I plan to actively monitor the market every day next week and see the opportunities to close my ratio back spreads before the expiry

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