How to Handle the Friday, January 15 Options Expiration

Followers of the Mad Hedge Fund Trader Alert Service have the good fortune to own TEN deep in-the-money options positions, all of which are profitable.  Six of these expire in six trading days on Friday, January 15, and I just want to explain to the newbies how to best maximize their profits.

These involve the following:

(TLT) 1/$164-$167 put spread

(TSLA) 1/$430-$460 call spread

(TSLA) 1/$570-$600 call spread

(WPM) 1/$39-$41 call spread

(GOLD) 1/$21-$23 call spread

(TSLA) 1/$830-$860 put spread

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

So far, so good.

The storming of Capital hill on Wednesday worked to the benefit of every one of these positions. Gold and silver took off, bonds stabilized, and Tesla ceased its heroic rally.

I’ll do the math for you on our oldest and least liquid position, the Tesla January 15 $430-$460 call spread, which I initiated on December 10, 2020 and will definitely run into expiration. At the Wednesday high, it was an astonishing $315, or 68.47%, in-the-money.

This is the biggest one-month stock gain I have seen in one of my positions in the 13-year history of this service.

Your profit can be calculated as follows:

Profit: $30.00 expiration value - $25.00 cost = $5.00 net profit

(4 contracts X 100 contracts per option X $5.00 profit per options)

= $2,000 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 January 18 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 January 15. 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