How to Handle the Friday April 16 Options Expiration

Followers of the Mad Hedge Fund Trader Alert Services have the good fortune to own no less than SIX deep-in-the-money options positions, all of which are profitable.  These expire in five trading days on Friday, April 16, and I just want to explain to the newbies how to best maximize their profits.

I will start sending out trade alerts with the closing P&Ls over two days starting on Thursday, April 15 so I don’t overwhelm your inbox with an overabundance of profits.

It was time to be aggressive. I was aggressive beyond the pale.

These involve the:

 

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2X (TSLA) 4/$450-$500 call spread            20%

2X (TLT) 4/$142-$145 put spread                 20%

(TLT) 4/$127-$130 call spread.                    - 10%

 

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(TSM) 4/ $111-$116 call spread                        10%

Provided that we don’t have a huge selloff in the markets or monster rallies in bonds, all six of these positions will expire at their maximum profit point.

So far, so good.

I’ll do the math for you on the United States Treasury Bond Fund (TLT) April 16 $142-$145 vertical bear put spread, which I initiated on March 23, 2021 and will definitely run into expiration. (TLT) shares are currently trading at $137.73, some $4.27 lower than the $142.00 strike price.

Provided that the (TLT) doesn’t trade above $142.00 in five days, we will capture the maximum potential profit in the trade. That’s why I love limited risk put spreads. They pay you even when you are wrong on the direction of the stock. All of the money we made was due to time decay and the decline in volatility in (TLT) shares.

Your profit can be calculated as follows:

Profit: $3.00 expiration value - $2.60 cost = $0.40 net profit

(4 contracts X 100 contracts per option X $0.40 profit per options)

= $1,600 or 16% in 19 trading days.

Many of you have already emailed me asking what to do with these winning positions.

The answer 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.

You don’t have to do anything.

Your broker (are they still called that?) will automatically use your long position to cover your short position, canceling out the total holdings.

The entire profit will be credited to your account on Monday morning April 19 and the margin freed up.

Some firms charge you a modest $10 or $15 fee for performing this service.

If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.

Although the expiration process is now supposed to be fully automated, occasionally machines do make mistakes. Better to sort out any confusion before losses ensue.

If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.

Keep in mind that the liquidity in the options market understandably disappears, and the spreads substantially widen when a security has only hours, or minutes until expiration on Friday, April 16. So, if you plan to exit, do so well before the final expiration at the Friday market close.

This is known in the trade as the “expiration risk.”

If for some reason your short position in your spread gets “called away,” don’t worry. Just call your broker and instruct them to exercise your long option position to cover your short option position. That gets you out of your position a few days early at your maximum profit point.

If your broker tells you to sell your remaining long and cover your short separately in the market, don’t. That makes money for your broker, but not you. Do what I say, and then fire your broker and close your account because they are giving you terrible advice. I’ve seen this happen many times among my followers.

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, always. Think of me as your trading guardian angel.

I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, sell high” thing going.

I’m looking to cherry-pick my new positions going into the next month end.

Take your winnings and go out and buy yourself a well-earned dinner. Just make sure it’s take-out. I want you to stick around.

Well done, and on to the next trade.

 

 

Ready to Put Out Any Fire