Followers of the Mad Hedge Fund Trader alert service have the good fortune to own TEN deep in-the-money options positions that expire on Friday, April 21, and I just want to explain to the newbies how to best maximize their profits.
These involve:
Risk On
(TSLA) 4/$130-$140 call spread 20.00%
(BAC) 4/$20-$23 call spread 10.00%
(C) 4/$30-$35 call spread 10.00%
(JPM) 4/$105-$115 call spread 10.00%
(IBKR) 4/$60-$65 call spread 10.00%
(MS) 4/$65-$70 call spread 10.00%
(BRK/B) 4/$260-$270 call spread. 10.00%
(FCX) 4/$30-$33 call spread 10.00%
(TLT) 4/$96-$99 call spread 10.00%
Total Aggregate Position 100.00%
Provided that we don’t have another 2,000-point move up or down in the stock market in the next eight trading days, these positions should expire at their maximum profit points.
So far, so good.
I’ll do the math for you on our deepest in-the-money position, the Tesla April $130-$140 vertical bull call debit spread. Since we are a massive $45.00, or 32% in-the-money with only eight days left until expiration I almost certainly will run into the April 21 option expiration.
Your profit can be calculated as follows:
Profit: $10.00 expiration value - $8.80 cost = $1.20 net profit
(12 contracts X 100 contracts per option X $1.20 profit per option)
= $1,440 or 13.64%.
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 in your debit spreads, canceling out the total holdings.
The entire profit will be credited to your account on Monday morning April 24 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 phone 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. You will notice that the highest volatility stocks, like Tesla, will maintain premium all the way into expiration.
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 21. 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.”
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.
The Options Expiration is Coming
