Just a quick note of appreciation for your helping me decide to get my clients into (GLD) with a 15% allocation early this year.
It sure has helped me to be more of a hero to my clients this year than a goat...
Best wishes to you and yours! Keep 'em coming.
Brad
Bakersfield, CA.
Ingenious writing John in your Monday morning strategy letter. I forwarded it to all my family and kids, and made my 16-year old read it out loud to my wife. I made sure he understood what he was reading. I got choked up by the whole article.
Go Ukraine!
Best regards,
Greg
Las Vegas, NV
Trade Alert - (AAPL) – BUY
BUY the Apple (AAPL) December 2026 $230-$240 at-the-money vertical Bull Call spread LEAPS at $5.50 or best
Opening Trade
9-5-2025
expiration date: December 18, 2026
Number of Contracts = 1 contract
With Apple about to announce its next-generation iPhone 17 on Sunday, which is AI-enabled, this is a good time to dive into a long-term Apple LEAPS.
You hear a lot of incredible stories in Silicon Valley.
An electronic compact disc is coming that can deliver perfect sound and movies. Have you heard of the Internet? Compaq is offering a computer that will sit on your laptop! Do you have any idea how Google is going to make money? Steve Jobs is building a smartphone! Is he out of his mind? Elon Musk is building an electric car with a 250-mile range. Hey, I heard about this thing called “artificial intelligence.”
So I listened very carefully the other day when a friend of mine told me he had scored the real estate deal of the century.
His house had sat on the market like dead wood for a year and a half, priced at $4.0 million. It was a very nice 5,000 square foot Italian villa-type home with a huge garden and a fantastic 360-degree view.
Then out of the blue, a cash buyer said he wanted to rent the house for a year for the spectacular over-the-market rent of $20,000 a month, plus all utilities. Then, he offered to pay 10% over the asking price, or $4.4 million to buy the house outright, and would pay $400,000 in cash for the option to do so, payable immediately.
My friend, puzzled but ecstatic, asked why he was going about buying a home in this way. The buyer answered that he had some stock options from his company that he didn’t want to cash in for a year. His profession? He had a PhD in artificial intelligence.
That set the alarm bells off in my head.
I pulled out a paper map of the San Francisco Bay Area and drew a circle around the house within one hour driving time to reduce the number of potential candidates. Then I called a seasoned technical analyst and asked him which big California stock had a chart that was just about to break out to the upside. He didn’t hesitate.
Apple!
It all makes so much sense. Apple is one company behind in artificial intelligence that has the most money to do something about it. All they have to do is buy a ready-made AI company like Perplexity, and it will be out front. The shares will race to $260. I then calculated how high Apple shares would have to rise to justify the enormous premium for my friend’s house. I hit bang on $260.
I am therefore buying the Apple (AAPL) December 2026 $230-$240 at-the-money vertical Bull Call spread LEAPS at $5.50 or best
DO NOT USE MARKET ORDERS UNDER ANY CIRCUMSTANCES.
These LEAPS are illiquid, so you are going to have to play around with prices to get a position. Start at $5.00, then increase to $5.50, $5.60, $5.70, and so on. Don’t pay more than $7.00, or these will get expensive. It is easier to do this on days when the stock market is down.
This is a bet that Apple (APPL) will not fall below $240 by the December 18, 2026, option expiration in 15 months. Apple shares have to rise only 70 cents in 15 months to hit the upper strike in this LEAPS.
To learn more about the company, please click here to visit their website.
Notice that the day-to-day volatility of LEAPS prices is minuscule, less than 10%, since the time value is so great and you have a long position simultaneously offset by a short one.
This means that the day-to-day moves in your P&L will be small. It also means you can buy your position over the course of a month, just entering new orders every day. I know this can be tedious, but getting screwed by overpaying for a position is even more tedious.
Look at the math below, and you will see that a 70-cent rise in (AAPL) shares will generate an 82% profit with this position, such is the wonder of LEAPS. That gives you an implied leverage of 117:1. LEAPS stand for Long Term Equity Anticipation Securities.
(AAPL) doesn’t even have to get to a new all-time high of $260 to make the max profit in this position, which it will probably do in weeks, if not months. It only has to get back to $240, where it traded in March before the meltdown.
Only use a limit order. DO NOT USE MARKET ORDERS UNDER ANY CIRCUMSTANCES. Just enter a limit order and work it.
Here are the specific trades you need to execute this position:
Buy 1 December 2026 (AAPL) $230 calls at………….………$38.00
Sell short 1 December 2026 (AAPL) $240 calls at…………$32.50
Net Cost:………………………….………..………….…...................$5.50
Potential Profit: $10.00 - $5.50 = $4.50
(1 X 100 X $4.50) = $450 or 82% in 15 months.
To see how to enter this trade in your online platform, please look at the order ticket below, which I pulled off of Interactive Brokers.
If you are uncertain on how to execute an options spread, please watch my training video on “How to Execute a Vertical Bull Call Debit Spread” by clicking here.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.
Don’t execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out.
Keep in mind that these are ballpark prices at best. After the alerts go out, prices can be all over the map.
Lately, I have spent my free time trolling the worst slums of Oakland, CA.
No, I’m not trying to score a drug deal, hook up with some ladies of ill repute, or get myself killed.
I was looking for the best-performing investment for the next 30 years.
Yup, I was looking for new homes to buy.
As most of you know, I try to call all of my readers at least once a year and address their individual concerns.
Not only do I pick up some great information about regions, industries, businesses, and companies, but I also learn how to rapidly evolve the Diary of a Mad Hedge Fund Trader service to best suit my voracious, profit-seeking readers.
So when a gentleman asked me the other day to reveal to him the top-performing asset of the next 30 years, I didn’t hesitate: your home equity.
He was shocked.
I then went into the economics of the Oakland trade with him.
West Oakland was built as a working-class neighborhood in the late 1890s because it was a short hop on the ferry to San Francisco. Many structures still possess their original Victorian gingerbread designs and fittings.
Today, it is a 5-minute BART ride under the Bay to the San Francisco financial district.
A one three-bedroom, two-bath home I saw was purchased a year ago for $450,000, with a $50,000 down payment, and a 6.5% loan on the balance.
The investor quickly poured $50,000 into the property, with new paint, heating, hot water, windows, a kitchen, bathrooms, and flooring.
A year later, he listed it for sale at $650,000, and the agent said there was a bidding war on that would probably take the final price up to $700,000.
Excuse me, gentlemen, but that is a 400% return on a 50,000 investment in 12 months.
As Oakland rapidly gentrifies, the next buyer will probably see a doubling in the value of this home in the next five years.
Try doing that in the stock market.
Needless to say, housing stocks like Lennar Homes (LEN), D.R. Horton (DHI), and Pulte Homes (PHM) need to be at the core of any long-term stock portfolio.
I then proceeded to list off to my amazed subscriber the many reasons why residential housing is just entering a Golden Age that will drive prices up tenfold, if not 100-fold, in the decades to come. After all, over the last 60 years, the value of my parents’ home in LA went up 100-fold and the equity 1,000-fold.
1) Demographics. The last decade started out as the hard decade for housing, when 80 million downsizing baby boomers unloaded their homes for greener pastures at retirement condos and assisted living facilities.
The 65 million Gen Xers who followed were not only far fewer in number, but earned much less, thanks to globalization and hyper-accelerating technology.
All of this conspired to bring us a real estate crash that bottomed out in 2011.
During the 2020s, the demographics math reverses.
That’s when 85 million millennials start chasing the homes owned by 65 million Gen Xers.
And as they age, this group will be earning a lot more disposable income, thanks to a labor shortage.
2) Population Growth
If you think it's crowded now, you haven’t seen anything yet.
Over the next 30 years, the US population is expected to soar from 335 million today to 450 million. California alone will rocket from 38 million to 50 million.
That means housing for 115 million new Americans will have to come from somewhere. It sets up a classic supply/demand squeeze.
That’s why megaprojects like the San Francisco to Los Angeles bullet train, which may seem wasteful and insane today, might be totally viable by the time they are finished.
3) They’re Not Building Them Anymore
Or at least not as much as they used to.
Total housing starts for 2024 were 1.55 million, a 3% decline from the 1.60 million total from 2023. Single-family starts in 2023 totaled 1.01 million, down 10.6% from the previous year. That means they are producing half of peak levels.
The home building industry has to more than triple production just to meet current demand.
Builders blame import taxes (tariffs) for materials like lumber (Canada) and drywall (Mexico), regulation, zoning, the availability of buildable land, lack of financing, and labor shortages.
The reality is that the companies that survived the 2008 crash are a much more conservative bunch than they used to be. They are looking for profits, not market share. They are targeting a specific return on capital for their business, probably 20% a year pretax.
It is no accident that new homebuilders like Lennar (LEN), Pulte Homes (PHM) and (DHI) make a fortune when building into rising prices and restricted supply. Their share prices have been on an absolute tear lately, and that is with a heartbreaking 6.5% mortgage rate.
This strategy is creating a structural shortage of 10 million new homes in this decade alone.
4) The Rear View Mirror
The Case Shiller CoreLogic National Home Price Index (see below) has started to fall after decades of increases. This will finally start to address affordability, one of the most daunting issues facing the market today.
Unless you have a new Internet start-up percolating in your garage, it is going to be very hard to beat your own home’s net return.
5) The Last Leverage Left
A typical down payment on a new home these days is 25%. That gives you leverage of 4:1. So in a market that is rising by 5.0% a year, your increase in home equity is really 20% a year.
Pay a higher interest rate, and down payments as low as 10% are possible, bringing your annual increase in home equity to an eye-popping 50%.
And if you qualify for an FHA loan up to $633,000, only a 3.5% deposit is required.
There are very few traders who can make this kind of return, even during the most spectacular runaway bull market. And to earn this money on your house, all you have to do is sleep in it at night.
6) The Tax Breaks are Great
The mortgage interest on loans up to $750,000 is deductible on your Form 1040, Schedule “A”, with a $40,000 limitation.
You can duck the capital gains entirely if the profit is less than $500,000, you’re married, and have lived in the house for 2 years or more.
Any gains above that are taxed at only a maximum 20% rate. These are the best tax breaks you can get anywhere without being a member of the 1%. Profits can also be deducted on the sale of a house if you buy another one at the equivalent value within 18 months.
7) There is No Overbuilding Anywhere
You know those forests of cranes that blighted the landscape in 2020? They are nowhere to be seen.
The other signs of excess speculation, liar’s loans, artificially high appraisals, and rapid flipping no longer exist. Much of this is now illegal, thanks to new regulations.
No bubble means no crash. Prices should just continue grinding upwards in a very boring, non-volatile way.
So the outlook is pretty rosy for individual homeownership for the foreseeable future.
Just don’t forget to sell by 2030 when the demographics reverse.
That's when the next round of trouble begins.
For Sale
I received a call from a friend the other day.
He said he bought Goldman Sachs last summer, a great move, since it has since risen by 86%. That is, until last week, when he got a margin call from Goldman Sachs. It turns out that he didn’t actually BUY (GS); he sold it short, accidentally clicking the bid instead of the offer on his online trading platform.
My friend asked if there was any recourse in this situation?
No, not a chance, not in a million years. Brokers are the most sued companies on the planet. They record absolutely everything and have massive teams of lawyers to defend themselves. Even when they mistakenly allocate someone else’s trade to your account, you only have 24 hours to contest it. After that, you own it.
Oh, if you accidentally do the wrong trade and it makes money, it will disappear from your account the second they become aware of it, even if it is months later.
What was the cost of this harsh lesson? $700,000.
So, today, I’m going to teach you how to execute one of my market-beating Trade Alerts to prevent you from suffering a similar $700,000 lesson yourself.
Pay attention, because if you have subscribed to Global Trading Dispatch or Mad Hedge Concierge, you will receive about 200 of these a year. These alerts will bunch up at market tops and bottoms. After that, we may see weeks of no action. Ideal entry points don’t happen every day of the year.
Following them is your path to understanding global financial markets.
You will also make a lot of money.
Most important is for you to add my email address to your address book. Otherwise, all my trade alerts will go into your spam filter, where they will disappear forever.
So please add alert@madhedgefundtrader.com right now to your email address book. To sign up for the Trade Alert Service so you can get alerts five seconds after they are issued, please email Filomena directly at support@madhedgefundtrader.com. Be sure to put “Text Alert Sign Up” in the subject line.
Let me show you a real-world example of how to do a round trip on a trade that I issued a few years ago.
First, start trading on paper only. All online brokers now give you the option to trade on paper with pretend money. They will even run a pretend P&L for you. That way, in a moment of excitement when you hit the bid instead of lifting the offer, you will lose $700,000 of pretend money, not the real thing.
Here's another hint. Check your positions at the end of every day. I know this can be tedious, but that way, if a surprise $16 million US Treasury bill position suddenly and erroneously ends up in your account (which happened to me last week), you can get on the phone immediately and get your friendly broker to move it into the correct account.
There are two ways to execute a trade: as a beginner or as a professional. I’ll focus on the latter.
You may notice that I send out a lot of trade alerts for options spreads, where I believe the best risk/reward for the individual trader lies. That’s because these include a hedge within a hedge within a hedge, which I will talk about another day.
These are illiquid securities that are executed by computer across 11 different online exchanges. These have wide dealing spreads. For example, yesterday I bought the Tesla (TSLA) August 2024 $150-$160 in-the-money vertical bull call debit spread at $8.60 or best. These expire worth $10 in nine trading days. The bid/offered spread was $8.30-$8.90.
This is how you enter your orders. Split your order into five parts. Then start at the middle market and place limit orders at $8.60, $8.70, $8.80, $8.90, and $9.00. You should get one or two fills at $8.80 and $8.90. If there is an intraday dip in the market, you will get all of them with an average price of $8.80. This is called scaling.
For overseas traders who are asleep when the US markets are open, such as those in Australia, this is a great approach. Just enter your limit orders before the market opens, go to sleep, and dream about how you will spend your profits. When you wake up, your files are in your in-box. I have followers in Australia who have been with me for a decade or more, and they say this approach works like a charm.
Holy smokes! What’s that?
That pinging sound from your cell phone tells you the Mad Hedge Fund Trader has just sent out a Trade Alert! The urgent text alert says:
MHFT ALERT- Buy ETF (TBT) at $57.06 or best, Opening Trade 9-8-2014, wgt: 10% =174 shares, SEE EMAIL
A minute later, I received the following email:
Sender: Mad Hedge Fund Trader
Subject: Trade Alert - (TBT) September 9, 2014
Trade Alert - (TBT)
Buy the ProShares Ultra Short 20+ Treasury ETF (TBT) at $57.06 or best
trade date 9-8-2014
Opening Trade
Portfolio weighting: 10%
Number of Shares: 174
You can buy this in a $57-$58 range and have a reasonable expectation of making money on this trade.
Logic to follow.
Here is the specific trade you need to execute this position:
Buy 174 shares of the (TBT) at……………$57.06
(174 shares X $57.56 = $10,015.44)
So that’s how it’s done.
You now own 174 shares of the (TBT). That is a bet that bond prices will fall and interest rates will rise.
So let’s see how that position worked out over the next several days.
Did you make money? Let’s see what transpired in the weeks after this trade alert was issued.
It turned out that the TBT was the perfect position to take at that time.
Bond prices fell pretty fast, and interest rates spiked up nicely, causing the (TBT) to jump by $2.91 in the following nine days. That works out to a nice little gain of 5%.
By the way, you can pull up these charts anytime you want for free by just going to www.stockcharts.com
What’s that? Here comes another text message from the Mad Hedge Fund Trader! Better check it out.
MHFT ALERT- Sell ETF (TBT) at $59.97 or best, Closing Trade 9-17-2014, wgt: 10% =174 shares, SEE EMAIL
The following email says:
Sender: Mad Hedge Fund Trader
Subject: Trade Alert - (TBT) September 17, 2014
Trade Alert - (TBT)
Sell the ProShares Ultra Short 20+ Treasury ETF (TBT) at $59.97 or best
trade date: 9-17-2014
Closing Trade
Portfolio weighting: 10%
Number of Shares: 174
Here is the specific trade you need to exit this position:
Sell 174 shares of the August 2014 (TBT) at……………$59.97
Profit: $59.97 - $57.06 = $2.91
174 shares X $2.91 = $506.34, or 0.51% for the notional $100,000 model portfolio.
So there, you’ve just made $506 in just 9 days, which works out to 0.51% per $100,000.
You did this, never risking more than 10% of your cash at any time.
Annualize that, and it works out to 206% a year.
That’s how it’s done. This is how the big boys do it. This is how I do it.
Of course, not every trade is a winner, and not all do this well so quickly. Sometimes, it requires the patience of Job to see a trade through to profitability. Last year, 90% of my trades made money. The rest I stopped out of for small losses. That’s because it’s easier to dig yourself out of a small hole than a big one.
But one thing is for sure. You win more games by hitting lots of singles. Beginners stand out by swinging for the fences and striking out almost every time.
So, watch your text message service for the next Trade Alert. Watch your email. And you can follow me on your way to successful trading and to riches.
Come join me for dinner at the Mad Hedge Fund Trader’s Global Strategy Dinner, which I will be conducting in Incline Village, Nevada, on Friday, August 22. An excellent meal will be followed by a wide-ranging discussion and an extended question-and-answer period.
I’ll be giving you my up-to-date view on stocks, bonds, currencies, commodities, precious metals, and real estate. And to keep you in suspense, I’ll be throwing a few surprises out there, too. Tickets are available for $249.
I’ll be arriving early and leaving late in case anyone wants to have a one-on-one discussion or just sit around and chew the fat about the financial markets.
The dinner will be held at the premier restaurant in Incline Village, Nevada, on the sparkling shores of Lake Tahoe. Those who live there already know what it is. The precise location will be emailed with your purchase confirmation.
I look forward to meeting you, and thank you for supporting my research. To purchase tickets for this dinner, please click here.
At some point in 2024, we are going to need to SELL. Maybe there will be an economic slowdown, a surprise election outcome, or a flock of black swans. However, there is selling and then there is selling.
I have a new training video on how to execute a vertical bear put debit spread. You can watch the full 34-minute video by clicking here.
The last one was made seven years ago.
Since then, we have learned a lot from customer questions. The nature of the options markets has also changed. I recommend watching it on full screen so you can read all the numbers on my options trading platform.
I am normally a pretty positive person.
For me, the glass is always half full, not half empty, and it’s always darkest just before the dawn. After all, over the past 100 years, markets have risen 80% of the time, and that includes the Great Depression.
However, every now and then, conditions arise where it is prudent to sell short or make a bet that a certain security will fall in price.
This could happen for myriad reasons. The economy could be slowing down. Companies might disappoint on earnings. “Sell in May, and go away?" It works….sometimes. Oh, and new pandemic variants can strike at any time.
Other securities have long-term structural challenges, like the US Treasury bond market (TLT). Exploding deficits as far as the eye can see assure that government debt of every kind will be a perennial short for years to come.
Once you identify a short candidate, you can be an idiot and just buy put options on the security involved. Chances are that you will overpay and that accelerated time decay will eat up all your profits, even if you are right and the security in question falls. All you are doing is making some options trader rich at your expense.
For outright put options to work, your stock has to fall IMMEDIATELY, like in a couple of days. If it doesn’t, then the sands of time run against you very quickly. Something like 80% of all options issued expire unexercised.
And then there’s the right way to play the short side, i.e., MY way. You go out and buy a deep-in-the-money vertical bear put debit spread.
This is a matched pair of positions in the options market that will be profitable when the underlying security goes down, sideways, or up small in price over a defined, limited period of time. It is called a “debit spread” because you have to pay money to buy the position instead of receiving a cash credit.
It is the perfect position to have on board during a bear market, which we will almost certainly see by late 2019 or 2020. As my friend Louis Pasteur used to say, “Chance favors the prepared.”
I’ll provide an example of how this works with the United States Treasury Bond Fund (TLT,) which we have been selling short nearly twice a month since the bond market peaked in July 2016.
On October 23, 2018, I sent out a Trade Alert that read like this:
Trade Alert - (TLT) - BUY
BUY the iShares Barclays 20+ Year Treasury Bond Fund (TLT) November 2018 $117-$120 in-the-money vertical BEAR PUT spread at $2.60 or best.
At the time, the (TLT) was trading at $114.64. To add the position, you had to execute the following positions:
Buy 37 November 2018 (TLT) $120 puts at…….………$5.70
Sell short 37 November 2018 (TLT) $117 puts at…….$3.10
Net Cost:………………………….………..………….…..........$2.60
Potential Profit: $3.00 - $2.30 = $0.40
(37 X 100 X $0.40) = $1,480 or 11.11% in 18 trading days.
Here’s the screenshot from my personal trading account:
This was a bet that the (TLT) would close at or below $117 by the November 16 options expiration day.
The maximum potential value of this position at expiration can be calculated as follows:
+$120 puts
-$117 puts
+$3.00 profit
This means that if the (TLT) stays below $117, the position you bought for $2.60 will become worth $3.00 by November 16.
As it turned out, that was a prescient call. By November 2, or only eight trading days later, the (TLT) had plunged to $112.28. The value of the iShares Barclays 20+ Year Treasury Bond Fund (TLT) November 2018 $117-$120 in-the-money vertical BEAR PUT spread had risen from $2.60 to $2.97.
With 92.5% of the maximum potential profit in hand (37 cents divided by 40 cents), the risk/reward was no longer favorable to carry the position for the remaining ten trading days just to make the last three cents.
I, therefore, sent out another Trade Alert that said the following:
Trade Alert - (TLT) – TAKE PROFITS
SELL the iShares Barclays 20+ Year Treasury Bond Fund (TLT) November 2018 $117-$120 in-the-money vertical BEAR PUT spread at $2.97 or best
In order to get out of this position, you had to execute the following trades:
Sell 37 November 2018 (TLT) $120 puts at……………........…$7.80
Buy to cover short 37 November 2018 (TLT) $117 puts at….$4.83
Net Proceeds:………………………….………..…………...........…....$2.97
Profit: $2.99 - $2.60 = $0.37
(37 X 100 X $0.37) = $1,369 or 14.23% in 8 trading days.
Of course, the key to making money in vertical bear put spreads is market timing. To get the best and most rapid results, you need to buy these at market tops.
If you’re useless at identifying market tops, don’t worry. That’s my job. I’m right about 90% of the time and send out a STOP LOSS Trade Alert very quickly when I’m wrong.
With a recession and bear market just ahead of us, understanding the utility of the vertical bear put debit spread is essential. You’ll be the only guy making money in a falling market. The downside is that your friends will expect you to pick up every dinner check.
But only if they know.
There is only us, there is no them, said director Ken Burns when speaking about the American people.
Thank John for his ceaseless banter. I enjoy this service so much. Great stories!!!!
I hope our paths cross soon.
Thank you.
Bill
North Carolina
Occasionally, I get a call from Concierge members asking what to do when their short positions in options were assigned or called away. The answer was very simple: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position instantly.
We have the good fortune to have Seven spreads left that are deep in-the-money going into the June option expiration in 7 trading days. They are the:
Risk On
(MSTR) 6/$330-$340 call spread 10.00%
(TSLA) 6/$190-$200 call spread 10.00%
Risk Off
(GLD) 6/$275-$285 call spread -10.00%
(AAPL) 6/$220-$230 put spread -10.00%
(QQQ) 6/$540-$550 put spread -10.00%
(TLT) 6/$88-$91 put spread -10.00%
(WPM) 6/$75-$80 call spread -10.00%
In the run-up to every options expiration, which is the third Friday of every month, there is a possibility that any short options positions you have may get assigned or called away.
Most of you have short option positions, although you may not realize it. For when you buy an in-the-money vertical option debit spread, it contains two elements: a long option and a short option.
The short options can get “assigned,” or “called away” at any time, as it is owned by a third party, the one you initially sold the put option to when you initiated the position.
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 correctly.
Let’s say you get an email from your broker telling you that your call options have been assigned away. I’ll use the example of the in-the-money SPDR Gold Shares SPDR (GLD) May $275-$285 vertical BULL CALL debit spread, which you bought at $9.00 or best on May 6.
For what the broker had done, in effect is allowed you to get out of your call spread position at the maximum profit point 7 trading days before the May 17 expiration date. In other words, what you bought for $9.00 on May 6 is now worth $10.00, a gain of 11.11%!
All you have to do is call your broker and instruct them to exercise your long position in your (GLD) June 275 calls to close out your short position in the (GLD) June $285 calls.
This is a perfectly hedged position, with both options having the same expiration date, the same number of contracts in the same stock, so there is no risk. The name, number of shares, and number of contracts are all identical, so you have no net exposure at all.
Calls are the right to buy shares at a fixed price before a fixed date, and one option contract is exercisable into 100 shares.
To say it another way, you bought the (GLD) at $275 and sold it at $285, paid $9.00 for the right to do so for 33 trading days, so your profit is $1.00, or ($1.00 X 100 shares X 12 contracts) = $1,200. Not bad for a 33-day defined, limited risk play.
Sounds like a good trade to me.
Callaways most often happen in the run-up to a dividend payout. If you can collect a full monthly or quarterly dividend the day before the stock registration dates by calling away someone’s short option position, why not? In fact, a whole industry of these kinds of strategies has arisen in recent years in response to the enormous growth of the options market.
(GLD) and most tech stocks don’t pay dividends, so callaways are rare.
Weird stuff like this happens in the run-up to options expirations like we have coming.
A call owner may need to buy a long (GLD) position after the close, and exercising his long May 205 call is the only way to execute it.
Adequate shares may not be available in the market, or maybe a limit order didn’t get done by the market close.
There are thousands of algorithms out there that may arrive at some twisted logic that the calls need to be exercised.
Many require a rebalancing of hedges at the close every day, which can be achieved through option exercises.
And yes, options even get exercised by accident. There are still a few humans left in this market to make mistakes.
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. They’ll tell you to take delivery of your long stock and then post additional margin to cover the risk.
Or they will tell you to sell your remaining long option position at whatever price you can get, wiping out most, if not all, of your great profit. This generates the maximum commission for your broker.
Either that, or you can just sell your shares on the following Monday and take on a ton of risk over the weekend. This generates oodles of commission for the brokers but impoverishes you.
There may not even be an evil motive behind the bad advice. Brokers are not investing a lot in training staff these days. It doesn’t pay. In fact, I think I’m the last one they really did train 50 years ago.
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 legal ways to steal money 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 on 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 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!