We have one options position that is in-the-money and about to expire at the close of business today, and I just want to explain to the newbies how to best maximize their profits.
This comprises the Currency Shares Japanese Yen Trust (FXY) August $97-$100 in-the-money vertical bear put spread with a cost of $2.70.
As long as the FXY closes at or below $97.00 today, the position will expire worth $3.00 and you will achieve the maximum possible profit of 11.11%.
That is not a bad return in only 11 trading days in this zero interest rate world.
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 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 FXY to take off to the upside once again, such as if Janet Yellen announces that there will never be another interest rate hike again, you should get the Trade Alert in seconds.
If the FXY expires slightly out-of-the-money, like at $97.01, 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 yen with a net cost of? $97.30.
You do not want this position 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 an amount of yen equal to the short position they inherit with the expiring FXY $100 put to hedge out their risk.
Then the long yen position is cancelled out by the short yen position resulting from the exercised put, and on Monday both disappear from your statement.
However, this can be dicey to execute going into the close.
So, for individuals, I would highly recommend just selling the August FXY $97-$100 put spread outright in the market if it looks like this situation may develop and the FXY is going to close very near the $97 strike, even if it as a loss.
The risk control is just too hard for individual traders 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 an extra commission on the sale of the yen.
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.
Now your only problem is to figure out how to spend the money.
Well done, and on to the next trade.