When the April 18 options expiration was only seven trading days away, there was a heightened probability that short options position gets called away.
I was already getting calls from holders of the iShares Barclays 20+ Year Treasury Bond Fund (TLT) April 2019 $128-$130 in-the-money vertical BEAR PUT spread who have seen their short April $128 puts called away.
When something like this happens, there is only one thing to do: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position. You just won the lottery, literally.
Most of you have short option positions, although you may not realize it. For when you buy an in-the-money put option spread, it contains two elements: a long put and a short put. The short put can get assigned or called away at any time.
You have to be careful here because the inexperienced can blow their newfound windfall if they take the wrong action, so here’s how to handle it.
What your broker would have to do in effect is allow you to get out of your put spread position at the maximum profit point, in this case, seven days before the April 18 expiration.
All you have to do is call your broker and instruct him to exercise your long position. In this scenario, it’s your April $130 long position to close out your short position in the April $128.
Puts are a right to sell shares at a fixed price before a fixed date, and one options contract is exercisable into 100 shares.
Sounds like a good trade to me.
Weird stuff like this happens in the run-up to options expirations.
A put owner may need to sell a long stock position right at the close, and exercising his long April 128 puts is the only way to execute it.
Ordinary shares may not be available in the market, or maybe a limit order didn’t get done by the stock market close.
There are thousands of algorithms out there which may arrive at some twisted logic that the puts need to be exercised.
Many require a rebalancing of hedges at the close every day which can be achieved through option exercises.
And yes, puts even get exercised by accident. There are still a few humans left in this market to blow it.
And here’s another possible outcome in this process.
Your broker will call you to notify you of an option called away, and then give you the wrong advice on what to do about it.
This generates tons of commissions for the broker but is a terrible thing for the trader to do from a risk point of view, such as generating a loss by the time everything is closed and netted out.
Avarice could have been an explanation here but I think stupidity and poor training and low wages are much more likely.
Brokers have so many ways to steal money legally that they don’t need to resort to the illegal kind.
This exercise process is now fully automated at most brokers but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.
Some may also send you a link to a video of what to do about all this.
If any of you are the slightest bit worried or confused by all of this, come out of your position IMMEDIATELY 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.