Followers of the Mad Hedge Technology Letter have the good fortune to own a deep in-the-money options position that expires on Friday, November 15, and I just want to explain to the newbies how to best maximize their profits.
This involves the:
the Boeing (BA) November 2019 $300-$310 in-the-money vertical BULL CALL spread
The total profit on this position will increase the value of our $100,000 model trading portfolio by an impressive 1.35%, or $1,375.
Provided that we don’t have a monster “RISK OFF” move in the market this week (more failure of the China trade talks? War with Iran? A massacre in Hong Kong?) which causes stocks to collapse and volatility to rocket, this position should expire at its maximum profit points. So far, so good.
I’ll do the math for you on the (BA) position. Your profit can be calculated as follows:
Profit: $10.00 - $8.75 = $1.25
(11 contracts X 100 contracts per option X $1.25 profit per options)
= $1,375 or 14.28% 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 November 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 mistakes do occur. 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 disappears and the spreads substantially widen when a security has only hours or minutes until expiration on Friday. 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 quarter end.
Take your winnings and go out and buy yourself a well-earned dinner. Or use it to put a down payment on a long cruise.
Well done, and on to the next trade.
