We have the February options expiration today and have the good fortune to see two positions in our model trading portfolio expire at their maximum potential profit point.
Those who held on through the dog days last week will be richly rewarded. Good job, and on to the next trade. You are one of the fortunate few who are up on the year.
Those include the:
(SPY) February $173-$178 deep in-the-money vertical bull call spread
(up +10.62%)
(SPY) February $176-$181 deep in-the-money vertical bull call spread
(up +9.56%)
We also have a March options position that is deep in the money and expires in 25 trading days, and I just want to explain to the newbies how to best maximize their profits here as well.
This comprises:
The S&P 500 (SPY) March $170-$175 deep in-the-money vertical bull call spread with a cost of $3.95.
As long as the (SPY) closes at or above $175.00 on Friday, March 18, the position will expire worth $5.00 and you will achieve the maximum possible profit.
This will work out to a 26.58% gain in seven weeks, not too shabby in these peripatetic times. Better that a poke in the eye with a sharp stick, as they say.
In this case, the expiration process 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.
Your broker (are they still called that?) will automatically use the long call to cover the short call, cancelling out the positions. The profit will be credited to your account on the following Monday, and the margin freed up.
Of course, I am watching these positions like a hawk, as always. If an unforeseen event causes the (SPY) to crash once again, such as if Janet Yellen suddenly, and shockingly, raising interest rates, you should get the Trade Alert in seconds.
If the (SPY) expires slightly out-of-the-money, like at $174.90, then the situation may be more complicated, and can become a headache.
On the close, your short call position expires worthless, but your long call position is converted into a large, leveraged outright naked long position in the (SPY) shares with a net cost of $173.95.
This position you do not want on pain of death, as the potential risk is huge and unlimited, and your broker probably would not allow it unless you put up a ton of new margin.
This is not what moneymaking and risk control is all about.
Professionals caught in this circumstance then sell short a number of shares of (SPY) on expiration day right at the close equal to the long position they inherit with the expiring $170 call to hedge out their risk.
Then the long (SPY) position is cancelled out by the short (SPY) position, and on Monday both disappear from your statement. However, this can be dicey to execute going into the close and requires a level of expertise most of you don?t have.
So for individuals, I would recommend just selling the March (SPY) $170-$175 call spread outright in the market if it looks like this situation may develop and the (SPY) is going to close very close to the $175 strike.
Keep in mind, also, that the liquidity in the options market disappears, and the spreads widen, when a security has only hours, or minutes until expiration. 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.
As of this writing, this position looks pretty safe as it is a full 18 points in the money. But a lot can happen in 26 days.
Well done, and on to the next trade.
