I just received an excited text message from an excited Concierge client. His short position in the (TSLA) February 2025 $540-$550 vertical bear put debit spread had just been called away. That meant he would receive the maximum profit a full 11 trading days before the February 21 option expiration.

With the heightened volatility this week, I am seeing an increasing number of options positions assigned or called away.

I know all of this may sound confusing at first. But once you get the hang of it, this is the greatest way to make money since sliced bread.

I still have five positions left in my model trading portfolio that is deep in-the-money, and about to expire in 9 trading days on the February 21 options expiration day. Those are the

 

Current Capital at Risk

 

Risk On 

(TSLA) 2/$300-$310 call spread        10.00%

(TSLA) 2/$310-$320 call spread        10.00%

(NVDA) 2/$90-$95 call spread           10.00%

(VST) 2/$100-$110 call spread           10.00%

 

Risk Off

(TSLA) 2/$540-$550 spread            -10.00%

 

Total Net Position                                30.00%

Total Aggregate Position                   50.00%

 

 

That opens up a set of risks unique to these positions.

I call it the “Screw up risk.”

As long as the markets maintain current levels, this position will expire at its maximum profit value.

There is a heightened probability that your short position in the options may get called away.

Although the return for those calling away your options is very small, this is how to handle these events.

If exercised, brokers are required by law to email you immediately, and I know all of this may sound confusing at first. But once you get the hang of it, this is the greatest way to make money since sliced bread.

If it happens, there is only one thing to do: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position instantly.

Most of you have short option positions, although you may not realize it. For when you buy an in-the-money vertical option 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 Berkshire Hathaway (BRK/B) August 2024 $405-$415 in-the-money vertical Bull Call spread since so many of you had these.

For what the broker had done in effect is allow you to get out of your call spread position at the maximum profit point 11 days before the August 16 expiration date.

In other words, what you bought for $8.70 on July 12 is now worth $10.00, giving you a near-instant profit of $1,300 or 14.94% in only  11 trading days.

All you had to do was to call your broker to instruct them to “exercise your long position in your (BRK/B) August 16 $405 calls to close out your short position in the (BRK/B) August 2024 $410 calls.”

You must do this in person. Brokers are not allowed to exercise options automatically, on their own, without your expressed permission.

You also must do this the same day that you receive the exercise notice.

This is a perfectly hedged position. The name, the ticker symbol, number of shares, and number of contracts are all identical, so you have no exposure at all.

Call options are a right to buy shares at a fixed price before a fixed date, and one option contract is exercisable into 100 shares.

Short positions usually only get called away for dividend-paying stocks or interest-paying ETFs like the (BRK/B). There are strategies out here that try to capture dividends the day before they are payable. Exercising an option is one way to do that.

Weird stuff like this happens in the run-up to options expirations like we have coming.

A call owner may need to sell a long (BRK/B) position after the close, and exercising his long (BRK/B) call, which you are short, 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 puts 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 blow it by writing shoddy algorithms.

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.

There is a further annoying complication that leads to a lot of confusion. Lately, brokers have resorted to sending you warnings that exercises MIGHT happen to help mitigate their own legal liability.

They do this even when such an exercise has zero probability of happening, such as with a short call option in a LEAPS that has a year or more left until expiration. Just ignore these, or call your broker and ask them to explain.

This generates tons of commissions for the broker but is a terrible thing for the trader to do from a risk point of view, such as generating a loss by the time everything is closed and netted out.

There may not even be an evil motive behind the bad advice. Brokers are not investing a lot in training staff these days. In fact, I think I’m the last one they really did train.

Avarice could have been an explanation here, but I think stupidity, poor training, and low wages are much more likely.

Brokers have so many ways to steal money legally 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 of 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!

You can count on a bear market hitting some time in 2038, one falling by at least 25%.

Worse, there is almost a guarantee that a financial crisis, severe bear market, and possibly another Great Depression will take place no later than 2058 and would take the major indexes down by 50% or more.

No, I have not taken to using a Ouija board, reading tea leaves, nor examine animal entrails in order to predict the future. It’s much easier than that.

I simply read the data that was just released from the National Center for Health Statistics, a subsidiary of the federal Centers for Disease Control and Prevention (click here for the link).

The government agency reported that the US birth rate fell to a new all-time low for the second year in a row, to 60.2 births per 1,000 women of childbearing age. A birth rate of 125 per 1,000 is necessary for a population to break even. The absolute number of births is the lowest since 1987. In 2017, women had 500,000 fewer babies than in 2007.

These are the lowest number since WWII, when 17 million men were away in the military, a crucial part of the equation.

Babies grow up, at least most of them. In 20 years, they become consumers, earning wages, buying things, paying taxes, and generally contributing to economic growth.

In 45 years, they do so quite substantially, becoming the major drivers of the economy. When these numbers fall, recessions and bear markets occur with absolute certainty.

You have long heard me talk about the coming “Golden Age” of the 2020’s. That’s when a two-decade-long demographic tailwind ensues because the number of “peak spenders’ in the economy starts to balloon to generational highs. The last time this happened was during the 1980’s and 19990’s stocks rose 20-fold.

Right now, we are just coming out of two decades of demographic headwind, when the number of big spenders in the economy reached a low ebb. This was the cause of the Great Recession, the stock market crash, and the anemic 2% annual growth since then.

The reasons for the maternity ward slowdown are many. The Great Recession certainly blew a hole in the family plans of many Millennials. Falling incomes always lead to lower birth rates, with many Millennial couples delaying children by five years or more. Millennial mothers are now having children later than at any time in history.

Burgeoning student debt, which just topped $1.5 trillion is another. Many prospective mothers would rather get out from under substantial debt before they add to the population.

The rising education of women is another drag on childbearing and is a global trend. When spouses become serious wage earners, families inevitably shrink. Husbands would rather take the money and improve their lifestyles than have more kids to feed.

Women are also delaying having children to postpone the “pay gaps” that always kick in after they take maternity leave. Many are pegging income targets before they entertain starting families.

As a result of these trends, one in five children last year were born to women over the age of 35, a new high.

This is how Latin Americans moved from eight to two-child families in only one generation. The same is about to take place in Africa, where standards of living are rising rapidly, thanks to the eradication of several serious diseases.

The sharpest falls in the US have been with minorities. Since 2017 the birth rates for Hispanics have dropped by 27% from a very high level, African Americans 11%, whites 5%, and Asians 4%.

Europe has long had the same problem with plunging growth rates but only much worse. Historically the US has made up for the shortfall with immigration, but that is now falling thanks to the current administration policies. Restricting immigration now is a guarantee of slowing economic growth in the future. It’s just a numbers game.

So watch that growth rate. When it starts to tick up again it’s time to buy….in about 20 years. I’ll be there to remind you with this newsletter.

As for me, I’ve been doing my part. I have five kids aged 15-34, and my life is only half over. Where did you say they keep the Pampers?

 

I’m Doing My Part

Now that you know how to make money in the market, I’m going to teach you how to hang on to it. There is no point in booking winning trades only to lose money by making careless beginner’s mistakes. So today, I am going to talk about risk control.

The first goal of risk control is to conserve whatever capital you have. I tell people that I am too old to start over again as a junior trader at Morgan Stanley if I lose all my money. With my attitude, nobody would hire me anyway. So, I’m pretty careful when it comes to risk control.

The art of risk control is to make sure your portfolio is profitable, no matter what happens to the market. You want to be a winner, whether the market goes up, down, or sideways. This is what I do.

Remember, we are not trying to beat an index here. Our goal is to make actual dollars at all times, to keep the P&L chart always moving from the lower left to the upper right. You can’t eat relative performance, nor can you use it to pay your bills.

The second goal of a portfolio manager is to make your portfolio bomb-proof. You never know when a flock of black swans is about to alight on the market, or a geopolitical shock comes out of the blue causing markets to crash.

The biggest mistake I see beginning traders make is that they are in too much of a hurry to get rich. As a result, they make too much money too soon. I can’t tell you how many times I have heard of first-time traders losing all their money on their first trade, well before they got a handle on the basics.

I’m usually right 80% to 90% of the time (this year it’s 95%). That means I’m wrong 10% to 20% of the time. If you bet the ranch on one of my losing trades, you’ll get taken to the cleaners. Never bet the ranch.

If you do, you are turning a calculated list into random risk, or throwing darts at a dartboard and hoping for the best. It is akin to buying a lottery ticket. I often tell clients they have gambling addictions. Make sure you’re not one of them. You can’t trade yourself back from zero with no money.

If you can master the skills I'm teaching you, you can make a living at this FOREVER! So, what’s the hurry? As my old trading mentor used to tell me, the late Barton Biggs of Morgan Stanley, “Invest in haste, repent in leisure,” a time-tested nostrum that is always true in this business.

I recommend that you use NO real money on your first few trades. Start with paper trading only. All of the online trading platforms offer wonderful tools that allow you to practice trading before you try the real thing. If you lose in their “pretend money”, no harm, no foul. They don’t want you to go broke either. Broke customers don’t pay commissions. They also sue.

The more time you spend learning to trade, the more money you will get out of it. Remember, work in, money out. Spend at least an hour or two getting to know your own trading platform well.

Once you start trading will real money it will become a totally different experience. Your heart rate steps up. Your hands get sweaty. You start checking your watch. It’s a lot like going into combat. In fact, combat veterans make great traders, which is why the military recruits so actively from the military. I think all these instincts trace back to our Neanderthal days when our main concern was being chased by a saber-toothed tiger.

The time to learn a trading discipline is NOW. All of a sudden, your opinions, your ego, and your savings are on the line. It’s crucial for you to always start small when using real money.

That way, making a beginner’s mistake, like confusing “BUY” and “SELL” (I see it every day) will only cost you a cup of coffee at Starbucks, and not your kid's college education, your house, or your retirement. It won’t take long for you to grow from one contract to thousands, as I have done myself for many years.

It’s all about finding your comfort level and risk tolerance. You never want to have a position that is so large that you can’t sleep at night, or worse, call me in the middle of the night and ask what to do with it. My answer is always the same. Cut your position in half. If you still can’t sleep, cut it in half again.

I make a bold prediction here. The more experience you gain, the faster your risk tolerance goes up.

I’ll give you one more piece of advice. Take your broker's technical support phone number and paste it to the top of your computer monitor. You don’t want to go look for it when you can’t figure out how to get out of a position, or your platform breaks. These are machines. It happens. As they teach in flight school, it’s not a matter of if but when a machine breaks.

There’s one more thing. When you’re ready to commit real money, don’t forget to take your account off of paper trading. The profits you make there can’t be spent.

Risk management is an important part of the position sheet I update every day.

Take a look below at a past position sheet I sent out during sharply rising markets.

 

 

The important thing to look at here is my long/short balance. On the left is the position name and on the right is the position weighting. I usually run 10% positions so I don’t have all my eggs in one basket. Maybe twice a year, I’ll run a 20% position in a single stock, and once a year I’ll have a 30% weighting. Above that, I start to lose sleep.

I have further subdivided the portfolio into “RISK ON” and “RISK OFF.” “RISK ON” means the world is getting better, while “RISK OFF” means the world is getting worse. The long positions have positive numbers, while the short positions have negative ones.

I like to balance “RISK ON” and “RISK OFF” to remove overall market risk from the portfolio. When markets are rising, I turn positive. When markets are falling, I tilt negative. At the bottom, I have my total net exposure. On this particular day, I was running 60% in long and 20% in shorts, for a total net position of 40% long. This is an aggressively bullish portfolio.

When I’m bullish, the net position is positive. When I’m bearish the net position is negative. When I have no strong views, the net position is zero. That way, if nothing happens you still get to rake the money in.

I have no positions at all only a few days a year. I only play when the risk/reward is overwhelmingly in my favor, and sometimes that is just not possible.

One more warning to the wise. There are literally hundreds of gurus out there marketing services promising 100% a year, if not 100% a month, or even 100% a day. They are all fake, created by 20-year-old marketing types who have never worked in the stock market, or even traded. Unfortunately, I work in an industry where almost everyone else is a crook.

I have worked in the markets for more than 50 years and have seen everything. Ray Dalio is the top-performing hedge fund manager in history and he only averages 35% a year.  The number of real traders who are right more than 80% of the time you can almost count on one hand. If returns sound too good to be true, they never are.

I want to offer special caution about naked put shorting strategies which are promoted by 90% of these letters. This is where a trader sells short a put position without any accompanying hedge, hence the word “naked.” This is an unlimited-risk position.

You might take in a $1 premium with this approach, but if the market turns against you, and implied volatilities go through the roof, your losses could balloon exponentially to $100 or more, wiping you out. The newsletters recommending these have absolutely no idea when or if this is going to happen.

I call this the “picking up the pennies in front of the steamroller strategy.” No professional trader worth his salt will put money into it. It is banned by most investing institutions. And only a few brokers will still let you do this, and then only with 100% margin requirements, because when losses exceed 100% of capital, they’re left carrying the bag.

Many of those strategies you see being hawked online look great on paper but can’t actually be executed. In other words, you just paid thousands of dollars for a service that is utterly useless. Sounds like a “No Go” to me.

Stop losses are an important part of any trading strategy.  No one is right 100% of the time. If they claim so they are lying. The best way to avoid a big loss is to take a small one.

There are many possible places to use stop losses. I use 2% of my total capital. If I start to lose more than that I am out of there. It’s easy for me to do this because 90% of the time the next trade will be a winner and I’ll make back all the money I just lost.

Others use a 10% decline in the underlying stock as a good arbitrary point to limit losses. Others rely on Fibonacci levels (I’ll get to him later). Many traders rely on key moving averages, like the 50-day or the 200-day.

The problem with this is that high-frequency traders have access to the same charting data as you do. They’ll program their algorithms to quickly take a stock through your stop loss level, buy your stock for cheap, and then take it right back up again to book a quick profit. You are left with a “SELL” confirmation in your inbox and no position in a rising market. No wonder people think Wall Street is rigged.

Another concept is the “trailing stop”. That’s when after an initial rise, you place a stop-loss order at your cost. That way you CAN’T lose money. This is known as “playing with the house's money.” This approach has one shortfall. You can’t place stop losses in the options market that are executed automatically. The same is true for options spreads.

In this case, you use what is known as a “pocket stop loss” where you set your mental level on when to get out. Also, these are not automatic, they do establish a trading discipline. Caution: You can’t execute a pock-stop loss when you’re playing gold or on a one-week cruise in the Caribbean.

So, there you have it. By managing your risk prudently, you can tip the risk/reward balance in your favor.

I hope this helps.