With the May 15 options expiration only ten trading days away, there is a heightened probability that your short options position gets called away.
We have the good fortune of having a large number of deep in-the-money call and put options spreads about to expire at their maximum profit points, five to be precise.
If that 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 with less risk. You just won the lottery, literally.
Most of you have short option positions, although you may not realize it. For when you buy an in-the-money put option spread, it contains two elements: a long put and a short put. The long put you own, but the short put can get assigned, or called away at any time and delivered to its rightful owner.
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.
All you have to do was call your broker and instruct him to exercise your long position in your May puts to close out your short position in the May puts.
Puts are a right to sell shares at a fixed price before a fixed date, and one option contract is exercisable into 100 shares.
Sounds like a good trade to me.
Weird stuff like this happens in the run-up to options expirations.
A put owner may need to sell a long stock position right at the close, and exercising his long Put is the only way to execute it.
Ordinary shares may not be available in the market, or maybe a limit order didn’t get done by the stock market close.
There are thousands of algorithms out there which 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, puts even get exercised by accident. There are still a few humans left in this market to blow it.
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.
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.
Avarice could have been an explanation here but I think stupidity and 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.
https://www.madhedgefundtrader.com/wp-content/uploads/2018/04/John-on-rock-story-3-image-2-e1524177504491.jpg300400MHFTRhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMHFTR2020-05-01 09:04:062020-06-08 12:27:35A Note on Assigned Options, or Options Called Away
There are disturbing rumors circulating that North Korean dictator, Kim Jung-un, either has the Coronavirus or is dead.
With North Korea firing several short-range missions again and three years’ worth of high-level US negotiations having come to absolutely nothing, the prospect of another Korean War is back on the table.
The big question for these traders is how to trade it, or better yet, make money from it.
I was copiloting a Boeing Stratofortress B-52 bomber during the mid-1970s, and our mission was to bomb North Korea. In the back, we carried four thermonuclear weapons.
Since we had bolted steel blast shields to the inside of our cockpit windshield, we were flying entirely on instruments. It was a three-hour flight to our target from Anderson Air Force Base in Guam.
Ten minutes before we reached our destination, we received an order to abort, and we turned the great lumbering birds back to our Pacific island base. After we returned from our seven-hour ordeal, we headed straight for Guam’s spectacular Tarague Beach, which only those with base access could access.
It was 1975, and this was a training mission that took place every Monday to Thursday. On Friday, we carried a load of conventional bombs and dropped them on a gunnery range in Western Australia, to practice air-to-air refueling each way.
We knew the North Koreans were tracking us on radar every step of the way. The message was very clear: Be good, or we’ll fly the extra ten minutes.
Some 45 years, these training missions are still going on.
Except for one thing: next time, there may not be an order to abort. The bombers will fly the last ten minutes. The Second Korean War will be on.
Donald Trump desperately needs a foreign policy win to get us to stop talking about the Corona epidemic. Thousands of Americans are still dying every day. He has to project strength.
Kim Jong-un has to keep his country in a permanent state of war to remain in power, and they don’t retire former leaders to pleasant bucolic golf clubs. In other words, he, too, has to project strength.
Given this calculus, it’s hard not to see a Second Korean War starting sometime in the future.
A carrier battle group from the Seventh fleet is already on station in the Yellow Sea. In ten days, it may be joined by a Nimitz class supercarrier, the USS Carl Vinson battle group, out of San Diego.
The Implications of a Second Korean War for your investment portfolio is potentially vast. But over the long term, they may not be as bad as you think.
Look at the performance of the markets going into America’s last two major wars, and you’ll get some idea of what’s coming.
When Saddam Hussein first invaded Kuwait in July of 1990, the initial market reaction was to sell off sharply, with the S&P 500 (SPX) diving some 20% (see charts below).
President George H.W. Bush endlessly threatened the Iraqis to leave, or else, while relentlessly carrying out one of the largest military buildups in Middle Eastern history.
I know because I participated as a Marine Corps pilot.
But then, a funny thing happened. Gradually convinced that the war would take place, the market started to grind up.
When the “Shock and Awe” US attack took place the following February, stocks rocketed some 30%, and never went down.
However, it was a different time. The US was far more dependent on Middle Eastern oil in those days. And for the US economy, it was the eve of the Dotcom Boom.
The Second Gulf War was a similar story, as the market was still in the throes of the Dotcom Bust.
We got the ritual 10% selloff during the military buildup. When the war commenced, we saw one of the sharpest rallies in market history, some 20% in a month. Stocks continued to gain until the Great Recession kicked in six years later.
So the pattern seems to be clear. The saber rattle is worse than the war. Hang on to your stocks and you will do well. If you get nervous, just turn off the TV and go play golf.
Over the longer term, a lot will depend on how long the Second Korean War will last.
A quick, decisive victory will be hugely market positive. Get four carrier groups in place and North Korea’s defensive capability will be gone in a day.
First, cruise missiles will take out their radar, then anti-aircraft installations, then their aircraft and communications.
Good luck running a 1.8-million-man army with motorcycle messengers. North Korea lacks a national network of towers to support cell phones.
Here’s the thing that most people don’t realize about the North Korean Army. Not a single individual has combat experience. We, on the other hand, have lots.
Much of the North Korean weaponry is World War II surplus, given to them by the Russian, Chinese, and surrendering Japanese. The imposing missiles you see on TV on parade days are all dummies.
Yes, the North Koreans have 100 nuclear weapons. But they have no functional delivery system. Any attempt to move them will bring their immediate destruction. And we know where they all live.
The 500,000-man South Korean army can provide a blocking action at the demilitarized zone to prevent a land invasion, while we take apart the North’s defenses piecemeal.
There are also 28,500 US troops in South Korea to provide logistics and support for a sustained air war.
In a sense, this is a war for which we have been preparing for 70 years.
Here will be the price.
The North Koreans have 10,000 long-range artillery dug into mountains just north of the demilitarized zone within range of Seoul, a city with a population of 10 million.
I know because I’ve seen them.
I was one of the first western journalists to visit North Korea in 1974. Somewhere in the NBC archives, there is a reel of shaky 8 mm footage to confirm this.
It might take 1-2 weeks of B-52 raids using conventional weapons to degrade this threat. There’s no doubt the North Koreans will cause substantial damage in the meantime.
But it would be worth the cost.
A unified Korea would be a hugely stabilizing development for Asia. Good for the US, not so good for China.
It would also allow the use of the greatly save on its defense budget, now that money needs to be spent elsewhere. Every allocation of American military resources I have seen over the past 50 years had a Korean War contingency to it. Not needing it anymore is worth $50 billion a year.
This is the dream scenario.
The nightmare scenario has the war dragging out for years and Chinese and Russian involvement, as with the first Korean War. It could go on for 18 years, as with our current war in Afghanistan.
The backbreaking cost of the second Iraq War, some $3 trillion, was a contributing factor to the Great Recession when stocks fell 52%.
Winning the war will be the easy part. Peace will be much heavier lift, for it means we immediately inherit 25 million starving people in the North.
How our relations with China fare during all of this is anyone’s guess.
Long term, this is all very market and risk positive. How big the bumps will be along the way is anyone’s guess as well.
The First Gulf War
The Second Gulf War
The First American Reporter to Visit North Korea Since the Korean War
https://www.madhedgefundtrader.com/wp-content/uploads/2017/08/john-north-korea-e1502728258580.jpg426300Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2020-05-01 09:02:022020-06-08 12:27:29Trading the Next Korean War
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Lately, my inbox has been flooded with emails from subscribers asking if the housing market is about to crash as a result of the pandemic and if they should sell their homes.
They have a lot to protect. Since prices hit rock-bottom in 2011 and foreclosures crested, the national real estate market has risen by 50%.
The hottest markets, like those in Seattle, San Francisco, and Reno, are up by more than 125%, and certain neighborhoods of Oakland, CA have shot up by 500%.
Looking at the recent housing statistics, I can understand their concern. The grim tidings are:
*2.9 Million Homes Now in Forbearance, and the number is certainly going to rise from here. Laid off renters are defaulting on payments, depriving owners of meeting debt obligations. It’s just a matter of time before this creates a financial crisis. Avoid the banks for now, no matter how cheap they get.
* Existing Home Sales Collapsed by 15.4%, in March. Realtors expect this figure to drop 40% in the coming months. Open houses are banned, sellers are pulling listings, and buyers low-balling offers. However, price declines in the few deals going through are minimal. When will the zero interest rates come through? Mortgage interest rates are higher now than before the pandemic because 6% of all home loans are now in default.
* Pending Home Sales Down a Staggering 20.8% in March, and off 16.3% YOY. The worst is yet to come. The West, the first into shelter-in-place, was down a monster 26.8%. Prices still aren’t moving because nobody can buy or sell.
*Chinese Buying of West Coast homes has vaporized over trade war fears, and then of the Covid-19 lockdown, which started with a shutdown of all flights from China.
I have a much better indicator of future housing prices than the depressing numbers above. The way homebuilder stocks like Lennar (LEN), KB Homes (KBH), and Pulte Homes (PHM) are trading, I’d say your home will be worth a lot more in a year, and possibly double in another five years. Many of these stocks are up nearly 100% since the March 23 bottom.
What I call “intergenerational arbitrage” will be the principal impetus. The main reason that we are now enduring two “lost decades” of economic growth over the last 20 years is that 85 million baby boomers are retiring to be followed by only 65 million “Gen Xer’s”. When you are losing 20 million consumers, economies don’t grow very fast. For more about millennial investing habits, please click here.
When the majority of the population is in retirement mode, it means that there are fewer buyers of real estate, home appliances, and “RISK ON” assets like equities, and more buyers of assisted living facilities, healthcare, and “RISK OFF” assets like bonds.
The net result of this is slower economic growth, higher budget deficits, a weak currency, and registered investment advisors who have distilled their practices down to only municipal bond sales.
Fast forward to the other side of the pandemic and the reverse happens. The baby boomers will be out of the economy, worried about whether their diapers get changed on time or if their favorite flavor of Ensure is in stock at the nursing home.
That is when you have 65 million Gen Xer’s being chased by 85 million of the “millennial” generation trying to buy their assets!
By then we will not have built new homes in appreciable numbers for 14 years and a severe scarcity of housing hits. Even before the pandemic, new home construction was taking place at half the 2008 peak. Residential real estate prices will naturally soar. Labor shortages will force wage hikes.
The middle-class standard of living will then reverse a 40-year decline. Annual GDP growth will return from the subdued 2% rate of the past three years to near the torrid 4% seen during the 1990s. It all leads to my “Return of the Roaring Twenties” scenario which you can learn about by clicking here.
It gets better.
It is certain that a future administration will restore tax deductions for state and local real estate taxes (SALT) lost in the 2017 tax bill. The cap on home mortgage interest rate deductions will also rise.
These two events will trigger an immediate 10% increase in the value of your home on an after-tax basis and more on the coasts.
So, if someone approaches you with a discount offer for your home, I would turn around and run a mile the other way.
You should also pile into the stocks, options, and LEAPS of housing stocks in any future market dip.
https://www.madhedgefundtrader.com/wp-content/uploads/2020/04/home-sales2.png385685Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2020-04-30 08:02:332020-06-08 12:12:20Why a US Housing Boom is Imminent
With the massive technology rally off the March 23 market bottom, the risk/reward for entering new trades has dramatically shifted.
Back then. I was begging followers to load the boat with the best big tech and biotech & healthcare names with call options and two-year LEAPS (Long Term Equity Participation Securities).
One reader told me he bought Humana (HUM) call options for 70 cents and sold them for a breathtaking $30 for a profit of 4,280%! FedEx showed up with a bottle of single malt Glenfiddich Scotch whiskey the next day.
The times have changed. Many tech stocks are now only a few dollars short of new all-time highs, like Microsoft (MSFT) and Apple (AAPL), or are at all tie highs, such as Amazon (AMZN), Teledoc (TDOC), and Zoom (ZM).
What a difference 6,000 Dow points make!
As a result, it is far more interesting now to pick up stocks that currently look like potential chapter 11 candidates, but will likely prosper once the American economy starts to reopen. Call it my “Reopening Portfolio.”
You can buy any of the stocks below outright, sit on them, and probably reap a double over the next two years. However, if you are a much more aggressive kind of trader like me, then you might consider LEAPS, where 500%-%1,000% profits are possible.
The advantage of a stock or a two-year LEAPS is that if we get a second Coronavirus wave in the fall, which is highly likely, you can outlast any short term pain and still come out a huge winner.
Some of these names we sold short at the market top and made a killing. It is now time to flip to the other side.
I am often asked how professional hedge fund traders invest their personal money. They all do the exact same thing. They wait for a market crash like we are seeing now and buy the longest-term LEAPS (Long Term Equity Participation Securities) possible for their favorite names.
The reasons are very simple. The risk on LEAPS is limited. You can’t lose any more than you put in. At the same time, they permit enormous amounts of leverage.
Two years out, the longest maturity available for most LEAPS, allow plenty of time for the world and the markets to get back on an even keel. Recessions, pandemics, hurricanes, oil shocks, interest rate spikes, and political instability all go away within two years and pave the way for dramatic stock market recoveries.
You just put them away and forget about them. Wake me up when it is 2022.
I put together this portfolio using the following parameters. I set the strike prices just short of the all-time highs set two weeks ago. I went for the maximum maturity. I used today’s prices. And of course, I picked the names that have the best long-term outlooks.
You should only buy LEAPS of the best quality companies with the rosiest growth prospects and rock-solid balance sheets to be certain they will still be around in two years. I’m talking about picking up Cadillacs, Rolls Royces, and even Ferraris at fire-sale prices. Don’t waste your money on speculative low-quality stocks that may never come back.
If you buy LEAPS at these prices and the stocks all go to new highs, then you should earn an average 131.8% profit from an average stock price increase of only 17.6%.
That is a staggering return 7.7 times greater than the underlying stock gain. And let’s face it. None of the companies below are going to zero, ever. Now you know why hedge fund traders only employ this strategy.
There is a smarter way to execute this portfolio. Put in throw away crash bids at levels so low they will only get executed on the next cataclysmic 1,000-point down day in the Dow Average.
You can play around with the strike prices all you want. Going farther out of the money increases your returns, but raises your risk as well. Going closer to the money reduces risk and returns, but the gains are still a multiple of the underlying stock.
Buying when everyone else is throwing up on their shoes is always the best policy. That way, your return will rise to ten times the move in the underlying stock.
If you are unable or unwilling to trade options, then you will do well buying the underlying shares outright.
Enjoy.
United Airlines (UAL) just raised $1 billion in a new equity issue to tide it over hard times. That is just a drop in the bucket for what it needs. It’s hard to imagine the company coming through the crisis without any government involvement. The most likely is for the feds to offer a big chunk of cash in exchange for a minority ownership. Around 35% might work, which is the portion the US Treasury of General Motors (GM) during the 2008-09 crash. Still, if you’re looking for a double in the shares, that just water off a duck’s back.
LEAPS: the January 21 2022 $45-$50 vertical bull call spread at a price of 83 cents delivers a 525% gain with the stock at $50, up 94.5% from the current level.
Delta Airlines (DAL) is Warren Buffet’s favorite airline, although he has been selling lately. All of the arguments above apply for this best run of US Airlines.
LEAPS: January 21 2022 $40-$45 vertical bull call spread at a price of 83 cents delivers a 502% gain with the stock at $45, up 98.8% from the current level.
MGM Resorts (MGM)
Yes, Las Vegas is reopening soon, but it certainly won’t resemble the old Vegas. (MGM) is the dominant hotel owner of the strip, owning the Bellagio, Mandalay Bay, Aria Resort, and MGM Grand hotels. It also has a China presence.
LEAPS: the January 21 2022 $25-$30 vertical bull call spread at 75 cents delivers 566% gain with the stock at $30, up 95.6% from the current level.
Wynn Hotels (WYNN)
We killed it on the short side with (WYNN), capturing an eye-popping 90% decline. (WYNN) is poised to lead the upturn. It has a major exposure in Macao, where China will lead any economic recovery.
LEAPS: the January 21 2022 $140-$150 vertical bull call spread at 90 cents delivers a 455% gain with the stock at $150, up 81% from the current level.
Union Pacific (UNP)
The reopening of industrial American means a resurgence of railroad traffic. These are not your father’s railroads. Over the last 30 years, they have evolved into highly efficient operators that offer the cheapest way far to over heavy good and bulk commodities, virtually turning into closet high-tech companies. (UNP) had the additional advantage in that as the country’s dominant East/West road, it stands to benefit the most from a recovery in trade with China. That is a likely outcome of any future administration.
LEAPS: the January 21 2022 $180-$185 vertical bull call spread at $1.40 delivers a 257% gain with the stock at $185, up 15.00% from the current level.
CSX Corp. (CSX)
Same arguments here, except that (CSX) wins on North/South trade, especially with Mexico. With a NAFTA 2 new trade agreement in place, this company benefits from an extra turbocharger.
LEAPS: the January 21 2022 $75.00-$77.50 bull call spread at 84 cents delivers a 495% gain with the stock at $77.50, up 16.27% from the current level.
Berkshire Hathaway (BRK/A)
Yes, they make more than sheets these days. Warren Buffet’s flagship holding company is the poster bot for industrial American. The shares are high priced, but after this 32% pullback, you may finally have a chance to get in.
LEAPS: the June 17 2022 $225-$230 vertical bull call spread at $2.61 delivers a 91.5% gain with the stock at $230, up 22.7% from the current level.
Boeing Co. (BA)
This has been the worst falling knife situation in the market for the last two years, cratering from $450 to $85, or down 81%. The decertification of the 737 MAX started the rot, and the grounding of its major airline customers was the coup de grace. This is another company that may require a government bailout and stock ownership, as it is a strategic national value. You may have to wait until the next administration as its Washington State location is currently politically incorrect.
LEAPS: the June 17 2022 $185-$190 bull call spread at $1.25 delivers a 400% gain with the stock at $190, up 47.8% from the current level.
Buy all eight of these and if they all work, your average return will be 411.4%.
https://www.madhedgefundtrader.com/wp-content/uploads/2020/04/John-thomas-gardening.png409283Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2020-04-28 09:02:242020-06-08 12:11:20Eight “Reopening” Stocks to Buy at the Market Bottom
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