Adding a Speculative Position CYS

With this posting I will be adding a speculative position with Cypress Sharpridge Investments, symbol CYS. This new position is for speculative purposes only and is not an added regular holding. This company is a mortgage reit that does business in government guaranteed mortgages. These are securities that are extremely interest rate sensitive as CYS buys the mortgages securities after first borrowing short term cheaper money then making their profit on the spread between the two. If short term interest rates go up then their profit is squeezed or in the worst case eliminated. So therefore the risk and speculative nature of the investment. The stocks prices of these type mortgage reits move very little unless interest rates go up and the price goes down significantly.

My purpose in this position is to take advantage of what I believe is a housing market that for the next few quarters is going nowhere. I still believe prices need to go down 10% to 20% more before housing can rebound. There is also significant overhang on supply from foreclosures and unsold new and existing homes. This will be a short term trade and will be reconsidered when the option I am selling expires.

The position I am taking will be selling a put on CYS for Sept. 2011 expiration at $12.50. The premium is 55 cents per share. If we have to take possession of the stock on that date we will also gain a 60 cent dividend making the cost basis $11.35 per share or about 9% less than the stock is currently selling. We prefer to take the premium and not the stock, but the purpose here is to build in protection going forward. The position will only be taken when we assess the price of CYS is below $13 adequately enough to make the trade sufficiently profitable.

As I have mentioned in earlier posts there has not been in decades and will not happen again in your lifetime to opportunity to buy a house at today's prices and interest rates. So the best approach is to buy a house. The second best is to take a position such as this one.