The difference between this week's breakout price and prior highest high illustrates the ambiguity of this breakout. Price channel boundaries may begin at the highest of for the past 20 days, but after that period of time has passed, the channel boundary begins to deteriorate as it follows the post-peak retracement.
I'll say up front, the prudent trader looking at this chart would wait for a break above $22.50 before acting. I'll add, I'm not always a prudent trader.
AMTG's upside bull-side breakouts have been successful two out of three times over the past two years, for an average profit each trade of 17%. Adjusting the profit by the 66.7% success rate gives an adjusted yield of 11.3%, quite an attractive level even if leverage isn't available.
Apollo Residential Mortgage isn't followed by enough analysts to produce a meaningful enthusiasm index.
The 28% return on equity surely is enough to warm any analyst's heart, although that warmth will quickly dissipate in the chill of debt more than five times equity. That level of debt isn't necessarily a built-in characteristic of Apollo's business. Some competitors get along quite well with lower levels.
The New York City company invests in mortgage- backed securities, which these days sound like a dirty word but which are also, still, key tools in the business of financing homes. In other words, Apollo is a real-estate investment trust, a REIT.
The story of REITs is that real estate is beginning to recovery, and that should be more profit in the sector, and therefore greater returns for REIT investors.
Apollo Residential Mortgage is an indirect subsidiary of Apollo Global Management (APO) and is a relatively new entity, with only five quarters of earnings history. Results have been stable the last four quarters, with two upside surprises and two to the downside. The first quarter available, back in 2011, showed a loss, but it has been profits ever since.
Institutions own only 41% of shares, a fairly low level, and yet the price is showing extreme optimism. It takes $7.70 in shares to control a dollar in sales.
AMTG on average trades 334,000 shares a day. For a stock with that volume, it supports a fairly good selection of option strike prices with near-the-money open interest running to three figures. The front-month at-the-money bid/ask spread for calls is 20%, on the high side.
But really, options are beside the point for a REIT. The big draw is dividends, and AMTG pays north of 12%.
Implied volatility stands at 20%, near the middle of the six-month range, and has fallen sharply today after a sharp bump up on Tuesday ended several days of sideways movement.
Options are pricing in confidence that 68.2% of trades will fall between $21.03 and $23.65 over the next month, for a potential gain or loss of 6%, and between $21.71 and $22.97 over the next week.
Trading in option contracts is fairly slow today, with calls at 44% of the five-day average volume and puts at 49% of average volume.
The fair-trade zone on today's 30-minute chart runs from $22.28 to $22.36, encompassing 68.2% of transactions surrounding the most-traded pricde, $22.35. With two hours left before the close, AMTG is trading at about the most-traded level, having had most of its price rise for the day in the first half hour of trading.
Apollo Residential Mortgage next publishes earnings on March 8. The company goes ex-dividend in March for a quarterly payout yielding 12.53% annualized at today's prices.
Decision for my account: I've opened a bull position on AMTG, structuring it as long shares in order to capture the dividend. It's a nice piece of diversification to my options-oriented portfolio, and the options give me a vehicle for hedging without selling if the price declines.
If the price rises, I'll add to the account by buying more shares.
References
My trading rules can be read here. A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.
And the classic Turtle Trading rules on which my rules are based can be read here.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
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