We have a couple of options positions that expire on Friday, and I just want to explain to the newbies how to best maximize their profits.
These include:
iShares Barclay 20+ Year Treasury Bond Fund (TLT) August, 2014 $115-$118 in-the-money bear put spread with a cost of $2.70
iShares Barclay 20+ Year Treasury Bond Fund (TLT) August, 2014 $117-$120 in-the-money bear put spread with a cost of $2.61
As long as the iShares Barclay 20+ Year Treasury Bond Fund (TLT) closes at $115.00 or below on Friday, you will achieve the maximum profit in both these positions. Today, the (TLT) closed at $114.76, so, so far, so good.
Both positions expire with a value of $3.00, giving you a profit of 11.1% on the $115-$118 put spread and 13% on the $117-$120 put spread.
In this case, the 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 put to cover the short put, cancelling out the positions. The profit will be credited to your account on Monday, and he margin freed up.
Of course, I am watching this position like a hawk. If an unforeseen geopolitical event causes the (TLT) to take off to the upside once again, such as if Russia invades the Ukraine in the next two days, I will quickly STOP OUT for a small loss. You should get the text alert in seconds.
Those who were able to put both spreads on will probably still make money overall, as the expiration breakeven point for the pair has been boosted to $115.69.
If the (TLT) expires slightly in the money, like at $115.05, or $115.10, then the situation may be a little more complicated, and can become a headache.
On the close, your short position expires worthless, but your long put position is converted into an outright naked short position in the (TLT) with a cost of $118.
This 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.
Professionals caught in this circumstance then buy a number of shares of (TLT) equal to the short position they inherit with the expiring $118 put. Then the short (TLT) position is cancelled out by the long (TLT) position, and on Monday both disappear from your statement. However, this can be dicey to execute going into the close.
So for individuals, I would recommend just selling the $115-$118 put spread in the market if it looks like this situation may develop and the (TLT) is going to close very close to $115.00.
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.
Well done, and on to the next trade.