Spreads are Wide–Limit Orders Required

Most all the folks that frequent this website know that when you are buying and selling preferred stocks and baby bonds it is absolutely NECESSARY to use ‘limit orders’.

One of my largest holdings is the Affiliated Managers Convertible ($50 issue) which took a pop of over $4/share today on 208 shares as a buyer was snoozing. This makes my account look good, but obviously is a great way to pee away $4/share–over 1,000 shares have now changed hands back down at around $42.

In particular when buying and selling these somewhat ‘illiquid’ shares one has to make sure to use those limit order.

17 thoughts on “Spreads are Wide–Limit Orders Required”

  1. Yes spreads are wider, but the preferred/market is far more “unstable” that it was pre-virus. In a “normal” preferred world, prices should only change at a glacial pace, say a few cents +/- per day for a $25 face preferred. The underlying math is that the risk premium, default risk, inflation and interest rates were also slowly changing. Yes, you would see occasional price spikes aka “mini flash crashes” a few times a week due to illiquidity and somebody placing market orders.

    Post virus, we have NOT returned to Kansas. Pretty much every single day, there are several $25 preferreds that trade $2 to $5 different than the previous days close. Sometimes it is up, sometimes it is down, sometimes it is an illiquid type flash crash, other times it a fundamental driven revaluation. But bottom line is for one reason or the other, some preferreds have “wild” excursions every single day post virus.

    A few examples from 6/1/20 trades

    CAI-PA traded 2.27 lower than previous close and 2.18 higher than previous close
    MHLA traded 2.10 lower
    OFSSZ traded 2.53 lower
    AGM-PA traded 2.52 higher

  2. Tim, you are not helping me with posts like this.

    I keep open sell orders at high prices for several of my less liquid preferreds. I make money almost every month from people putting in market orders – and I almost always can buy shares back within a day or two after prices fall back. Its not big money, but it adds up over the course of the year.

    So, please stop scaring off the fish!
    😉

  3. I don’t look at pfds as vehicles to flip for short term gain. I buy them for the dividends as long term investments. When the pps goes up, I smile. When it goes down, I buy more.

    I buy pretty conservative stuff. They have to be investment grade and cumulative. Also I never buy over issue price.

    Pretty dull, huh?

    1. Ron; Iam very much like you. I have never been a flipper of anything and especially preferreds. I will pay over par however but usually not too far over. Also I have many many preferreds that are Non-Cumulative. If you ONLY buy cumulative you actually miss out on some really good offerings over the years. Plus it really limits your universe as to what you can even buy. I own a ton of all the Super Mega Banks/Brokerages. They all have great coupons and great call protection. I bought most of them back in March at prices of $22 and $23 and now they are all well over $27+. I like it.

      1. Chuck you have to view your preferreds in terms of present price not purchase price. They have to be marked to market. This is important in terms of preferreds with call dates because eventually the tide will come in to start the anchoring the preferred to par process as it eventually starts approaching its call date a year to two years out. Its just the way it normally is.
        The best decision may well be to hold and lose that $2 and ride it back towards par. But unless you trade to lock in gains that price will prove illusionary eventually and will be a drag on mark to market.

        1. Grid you’re describing YTC of course. We don’t have to look far for good examples.

          A-rated ENO last trade reflects a coupon of 5.5%, a current yield of 5.16%, though a YTC of -1.29%.

          BBB-rated PLDGP last trade reflects a coupon of 8.54%, a current yield of 5.75% and a YTC of -1.15%.

          Both IG, though unless flipping for cap gains, the glide path of each of these issues suggests your money would do better under a mattress rather than holding.

          1. Alpha, I suspect you are as interested in playing a game of flipping chicken with PLDGP as much as I am, ha.

    2. Ron I do the same thing as you. I am slowly building up a portfolio of high quality preferreds for the long term.

      Getting tougher to find good ones near par though. Patience required!

    3. Ron, preferreds were intended as long term investments. Those who actively trade them are the exception, though there’s a number of them on this board. I do it because it’s been a profitable strategy.
      Don’t rule out issues above par. They can be bargains too when price is suppressed by call risk. Sometimes the tradeoff is a good deal.
      And non-cumuative isn’t a deal breaker, the reality isn’t as bad as the scare.

  4. Flipping TFC/PRO bought at ipo mid-May below $25 (thank you iiInv) for $25.6x today. Sure, it is IG but hope there will be more similar opportunities ahead.

    I see a lot of other preferreds I own, especially the better rated ones and ones such as FFC that hold a lot of quality preferreds trading at 5-7 week highs today.

    Wondering if this is the Fed good quality bond buying spree in high gear

    1. Looks like the preferreds are recovering well, make a good gain on most of the ones I bought. The best one was COF-J, bought at 20.4 and it is 22 now,

      Thank you to all the smart guys on this forum for guidance.

    1. When the spreads are wide I’ve been relatively successful offering the bid price then flipping at the ask price. Crazy?

      1. Hank if your that good here is one you can make a mint on now… BURCP.. Bid of $52.50 and ask of $500….Is that spread wide enough for you? 😀

        1. That is what happens when you aren’t allowed to short a security…..

          1. And there is a reason for that….A Semi retired leftover 2000 share float that was issued in 1920s. Since 2008 has only traded about 2400 shares total. And I would suggest the same few hundred were churned over and over, as I know Camroc and I have churned a few over the past 4-5 years.

    2. mcg–yes there were 208 total volume and I didn’t check the detail

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