We have two options position that are in-the-money and expire in 11 trading days, and I just want to explain to the newbies how to best maximize their profits.
the S&P 500 (SPY) June $212-$217 in-the-money vertical bear put spread with a cost of $4.51
the Japanese Currency ETF (FXY) June $91-$94 vertical bear put spread with a cost of $2.65
As long as the (SPY) closes at or below $212.00 on Friday, June 17, the position will expire worth $5.00 and you will achieve the maximum possible profit of 10.86%.
As long as the (FXY) closes at or below $91 on Friday, June 17, the position will expire worth $3.00 and you will achieve the maximum possible profit of 13.20%.
Better that a poke in the eye with a sharp stick, as they say.
In this case, the expiration process is very simple. You take your left hand, grab your right wrist, pull it behind your neck and pat yourself on the back for a job well done.
Your broker (are they still called that?) will automatically use the long put to cover the short put, cancelling out the positions. The profit will be credited to your account on the following Monday, and the margin freed up.
Of course, I am watching these positions like a hawk, as always. If an unforeseen geopolitical event causes the (SPY) or the (FXY) to take off to the upside once again, such as Janet Yellen announces that there will never be another interest rate hike again, you should get the Trade Alert in seconds.
If the (SPY) expires slightly out-of-the-money, like at $214.10, then the situation may be more complicated, and can become a headache.
On the close, your short put position expires worthless, but your long put position is converted into a large, leveraged outright naked short position in the (SPY) with a net cost of? $217.49.
This position you do not want on pain of death, as the potential risk is huge and unlimited, and your broker probably would not allow it unless you put up a ton of new margin.
This is not what moneymaking is all about.
Professionals caught in this circumstance then buy a number of shares of (SPY) on expiration day equal to the short position they inherit with the expiring $217 put to hedge out their risk.
Then the long (SPY) stock position is cancelled out by the short (SPY) resulting from the exercised stock position, and on Monday both disappear from your statement. However, this can be dicey to execute going into the close.
So for individuals, I would recommend just selling the $214-$217 put spread outright in the market if it looks like this situation may develop and the (SPY) is going to close very close to the $214 strike, even if it as a loss.
The risk control is just too hard to handle.
There is another reason to come out early. Some brokers exercise the options in the spread into shares on expiration, and then hit you with a another commission on the sale of the shares.
So check with you broker to see how they handle options expirations.
To be forewarned is to be forearmed.
Keep in mind, also, that the liquidity in the options market disappears, and the spreads widen, when a security has only hours, or minutes until expiration. This is known in the trade as the ?expiration risk.?
One way or the other, I?m sure you?ll do OK, as long as I am looking over your shoulder, as I will be.
Well done, and on to the next trade.