With the December 15 options expiration only five trading days away, we have the good fortune to have four profitable deep in-the-money options positions.

Those include:

The Bank of America (BAC) December, 2017 $25-$26.50 in-the-money vertical BULL CALL spread

The iShares Barclays 20+ Year Treasury Bond Fund (TLT) December, 2017 $129-$131 in-the-money vertical BEAR PUT Spread

The Currency Shares Euro Trust (FXE) December, 2017 $111-$113 in-the-money vertical BULL CALL spread

The Currency Shares Euro Trust (FXE) December, 2017 $116-$118 in-the-money vertical BEAR PUT spread

The probability is now high that all of these positions will expire at their maximum profit point and that you will close out December with another blockbuster month.

It is remotely possible that some of you may receive notices from your brokers over the next few days warning that your short call or short put positions may get called away.

Brokers have recently started doing this to avoid getting sued for failure to give notice, which they always do.

While it is theoretically possible that your in-the-money calls could get called away, it is highly unlikely.

Weird stuff happens on options expirations.

A call owner may need to cover a short position right at the close today and exercising his long calls (your short calls) is the only way to cover it.

There are thousands of algorithms out there, which may arrive at some twisted logic that the calls needs to be exercised.

And yes, calls get exercised by accident. There are still a few humans left in this market.

All of these fun and games happen right at the market close.

If you do receive such an exercise notice, take it as a gift. It means you don't have to wait until the expiration day to come out of you position with its maximum profit, you can exit RIGHT NOW.

When options owners exercise their positions before expiration day, they are giving up all of the premium in those options. That lost premium becomes your profit, as you are short.

If your calls or puts ARE called away, this is what you do.

Call your broker and tell him you want to exercise YOUR long calls or puts to meet the short position in your calls or puts. This is a perfect hedge.

This exercise process is now full automated at most brokers, but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.

If any of you are the slightest bit worried or confused by all of this, come out of your position RIGHT NOW at a small profit! You should never be worried or confused about any position tying up YOUR money.

Professionals do these things all day long, and exercises become second nature, just another cost of doing business. If you do this long enough, eventually you get hit. I bet you don't.

Calling All Options!

Q: Is NVIDIA (NVDA) in buy territory yet?

A: The answer is no. The whole technology area is wildly overdue for a rest. I'll take a look at $160.

Q: Is technology (XLK) over, or is this a brief dip and a continued uptrend?

A: There will be a continued uptrend in technology and the only question is whether the pullback will be for days, weeks, or months? You basically always buy every dip in technology until we hit a recession, which is about 2 years away. You just have to ask yourself how much pain you are willing to take in the interim. We have had pretty dramatic selloffs, and NVIDIA at one point was down 20% from the high, but that's what you get with a stock that goes up 300% in a year.

Q: What instrument do you put your money into when you go to cash?

A: I just move it into a cash account in my brokerage account. If you think you're going to be in cash for a while, like a couple of months, then it's worth buying 30 day or 90 day Treasury bills. That will at least give you some interest income, about 130 basis points annualized, but it's better than nothing at all. If you're in and out on a short-term basis, then it's not even worth buying Treasury bills unless you're a giant institution managing billions of dollars, in which case even one day of interest will add up to quite a lot of money.

Q: How long will the tech selloff last?

A: For the last 30 years, all tech selloffs have been temporary. Tech always comes back. Even if the stocks themselves get overvalued, the industry itself keeps growing exponentially. In my lifetime, tech has gone from 2% to 25% of the S&P 500 and it will be 50% in the next 20 years.

Q: Homebuilders have had a huge year. Will they continue to rise in 2018?

A: Yes, they will because we have a structural shortage of houses, both old and new, and that is so severe that it will take decades to sort out. As much as you've had these monster runs in housing stocks, they will continue to outperform next year. There is essentially no inventory on the market. Inventory is at 30 year lows and the only way to address that is to build more houses at higher profit margins. That is incredibly good news for the housing industry.

Q: Do you see 4% GDP growth in 2018 if they pass the tax bill?

A: Answer, No. We will continue with the same 2.5% to 3% annualized growth rate that we had for the last 9 years. It's almost impossible to go against the demographic tide. The tax bill with either have no effect on the economy, or a negative effect as I explained in the newsletter today. Half the country is getting hit with a big tax rise, especially homeowners. About 60% of the country are homeowners and they will all see higher taxes. They will reduce consumption, while the people getting the tax windfalls in red states who are non-homeowners, will save their tax windfall. The net effect on the economy is negative. That's why I expect the whole tax bill to be reversed in three years.

Q: Is today a good day to buy more US Treasury Bond Fund (TLT) put spreads?

A: Yes, but I would go out one more dollar on the strikes to give yourself a margin of safety and diversify risk. I would do a December $130-$132 bear put spread here, or I would go out to January and do the $131-$133 bear put spread. We could be topping here and looking at the charts shows there is a double top written all over it. If we take a run at $128 or $129, I am going to sit because I am betting this is just a brief spike up and then we give it all back. On the other hand, if we decisively break through $129 on high volume then I will stop out of our current (TLT) position and take my loss. It's all about risk control go into year end.

Q: How well did Black Friday/Cyber Monday help the bottom line and should I get into retailers now?

A: The answer is a firm "NO". We are seeing a couple of short term positives for the retail industry, including companies like Macy's (M). First, they are coming off of severely oversold conditions. They were the worst performing sector in the market this year. Number two, the Christmas sales have been fantastic, a function of a full employment economy and a growing GDP. All of this comes to an end in January when the super sales start and people start getting those giant credit card bills from December. You will see a lot of bankruptcies in retail. This is their last payday, and once they collect the cash, they will go out of business. Don't touch the retailers here, structurally, they are in terrible condition.

Q: Should I short the British pound (FXB) now after assassination threats to the Prime Minister and poor handling of Brexit?

A: Absolutely not, as I am bullish on the pound. My view is they eventually cancel Brexit, and when that happens the pound will rally back to its pre-Brexit level of $1.60. Do not short the pound down here. It could be a big mistake.

Q: What do you see oil (USO) doing in 2018?

A: We will break $60 but not by much. Fracking supply comes in in a major way around current levels. Look for increasing supply to be capping any oil moves from here. This is not a long play at this point, if anything, this is a short play.

Q: How will airline stocks like Delta (DAL) do in 2018?

A: The answer is good. These are high tax, domestic stocks which are doing fabulously well right now. When was the last time you saw an empty seat on an airplane? Basically, the industry concentration is so enormous right now, with the top four airlines getting 80% of the business. It's a license to print money and I am bullish on airlines.

Q: Do you see (TLT) under $118 by March 2018?

A: I would say yes, there is a 50/50 chance we could be under $118 by March. I can see that you are looking at LEAPS with that $118 strike and that's a good idea. Even if you do something like a $115-$118 leap now, that will double in value if the (TLT) moves to around $123, and we were there only last Friday, so it's not like it's impossible. Even if we do not hit $118, that could be a money maker in the short term.

Q: Would a stock dump be good for bonds?

A: Yes, because there will be a stampede into low interest, flight to safety instruments. Even that is not working right now and money is pouring into everything regardless of the fundamentals, thanks to global quantitative easing. That is why we are getting a spike up in the (TLT) today.

Q: What is the impact of the tax bill on the market?

A: There is a shot they might get something through before yearend, and if they do, expect a sharp rally that will close all markets at all-time highs, and I am guessing that is what will happen. I am much less positive in January.

Q: What is your favorite tech stock?

A: Being an old, conservative guy, I would say Apple (AAPL). It's going to have less volatility than the other tech stocks. The next move is probably down in the tech sector so I rather own one that goes down the least. That will be Apple. Even then I would still wait for a better entry point. I'm a short-term trader and not a long-term investor so I am cautious of anything that has doubled recently on the long side.

Q: Will the government shut down?

A: Maybe yes, for a day. Will it have a market impact? Yes, for a day. That has been the pattern with all past government shutdowns and I expect the President to favor a shutdown because it creates more instability and controversy which he seems to thrive on.

Good luck and good trading!

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

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