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Trade Alert – (SPY) – Expiration
Expiration of the SPDR S&P 500 (SPY) November, 2013 $180-$183 bear put spread at $2.95
expiration date: November 15, 2013
Portfolio weighting: 10%
Number of Contracts = 37 contracts
Someone made a heroic effort to make sure that our expiring SPDR S&P 500 November, 2013 $180 puts expired out of the money by artificially ramping up the (SPY) right on the last tick of the day. This is common, and is known as fun and games on expiration day. They succeeded, but only just, by 5 cents.
As a result, we lost $185 per contract of the maximum potential profit on the trade of $999, leaving us with a net profit of $814 for each contract of the put spread you owned.
However, this has created a small headache for us, because we no longer have the short $180 put position to offset our long $183 puts at the expiration. So you have to do some extra work to completely get out of the position. This is known as the “expiration risk.”
Your broker has almost certainly exercised your long $183 put, and sold the stock to the person who shorted the put to you. They are now long stock (SPY) at $183, and you are now short (SPY) stock at $183. This is a good thing because it leaves you with a $2.95 value for each $183 put, or some $0.22 more than you paid for the entire put spread.
Needless to say, you get to keep the entire proceeds of the $180 puts that you sold short, as they expired worthless.
But to get out of this position, you now need to cover your short position in the S&P 500 (SPY). You can do this at the opening at market on Monday morning, and the position will be entirely liquidated. If the market opens below today’s close of $180.05 you will end up making more money, since you are short stock in a falling market. If it opens over $180.05 you will make less.
If you have insufficient margin to run such a short, your broker will automatically cover your short at the Monday opening. In fact, he has probably sent you an email already informing you of his intentions.
Professionals will manage this short position along with all their others. I don’t recommend that you do this, as it is always best to cover your option created shorts at the opening on Monday morning to limit your losses and keep your risk from running away.
Don’t try to trade a leveraged short (SPY) position in a bull market. It’s probably beyond your pay grade, and I doubt you’ll sleep at night.
If you have any questions, call your broker and they will tell you what to do. Here, an ounce of prevention is worth a pound of cure. Then it’s on to the next trade.
Here is the P&L for the closed position, assuming you bought stock at the Friday close to go flat:
Expiration of long 37 November, 2013 (SPY) $183 puts at……$2.95
Expiration of short 37 November, 2013 (SPY) $180 puts at..….$0.00
Realized Profit at expiration: $2.95 – $2.73 = $0.22
(37 X 100 X $0.22) = $814 or 0.81% profit for the notional $100,000 portfolio.