How to Handle the Friday, February 19 Options Expiration

Followers of the Mad Hedge Fund Trader Alert Services have the good fortune to own no less than 16 deep in-the-money options positions, all of which are profitable. All but one of these expire in two trading days on Friday, February 19, and I just want to explain to the newbies how to best maximize their profits.

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

These involve the:

Global Trading Dispatch

(TSLA) 2/$650-$700 call spread 20.00%
(TSLA) 3/$600-$650 call spread
(MS) 2/$55-$60 call spread 10.00%
(BA) 2/$150-$160 call spread 10.00%
(BLK) 2/$640-$660 call spread 10.00%
(GS) 2/$240-$260 call spread 10.00%
(AMD) 2/$75-$80 call spread 10.00%
(BAC) 2/$28-$30 call spread 10.00%
(KO) 2/$44-$47 call spread 10.00%

Mad Hedge Technology Letter

NFLX 2/ $510- $515 call spread 10.00%
AMZN 2/ $3,095- $3,100 call spread 10.00%
AAPL 2/ $126-$129 call spread 10.00%
INTU 2/ $340-$345 call spread 10.00%
QCOM 2/ $135-$140 call spread 10.00%

Mad Hedge Biotech & Healthcare Letter

(AZN) 2/$46.50-$49.50 call spread 10.00%
GILD 2/ $57-$60 call spread 10.00%

Provided that we don’t have a huge selloff in the markets or monster rallies in bonds, all 15 of these positions will expire at their maximum profit point.

So far, so good.

I’ll do the math for you on our oldest and least liquid position, the Tesla February 19 $650-$700 vertical bull call spread, which I initiated on January 25, 2021 and will definitely run into expiration. At the Friday high, Tesla shares were at a lowly $816, some $53 lower than the $869.70 that prevailed when I strapped on this trade.

Provided that Tesla doesn’t trade below $700 in two days, we will capture the maximum potential profit in the trade. That’s why I love call 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 Tesla stock.

Your profit can be calculated as follows:

Profit: $50.00 expiration value - $44.00 cost = $6.00 net profit

(4 contracts X 100 contracts per option X $6.00 profit per options)

= $2,400 or 20% in 18 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 February 22 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 security has only hours, or minutes until expiration on Friday, February 19. 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.

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