Mad Hedge Biotech & Healthcare Letter
May 6, 2021
Fiat Lux
FEATURED TRADE:
(THE WHITE KNIGHT OF BIOPHARMA)
(PFE), (AMGN), (BMY), (LLY), (GILD), (MRK), (BNTX), (VTRS), (GSK)
Posts
After a week of dissatisfying earnings reports from huge biopharmaceutical firms like Amgen (AMGN), Bristol-Myers Squibb (BMY), Eli Lilly (LLY), Gilead Sciences (GILD), and Merck (MRK), one company has managed to buck the trend: Pfizer (PFE).
In its first quarter earnings report for 2021, Pfizer reported adjusted diluted earnings of 93 cents per share, surpassing the earlier experts’ estimate of 77 cents.
Even its reported revenue exceeded the earlier predictions of $13.4 billion, raking in $14.6 billion during the period instead.
Aside from those, Pfizer also massively boosted its projected revenue from the COVID-19 vaccine it developed with BioNTech (BNTX).
Pfizer’s COVID-19 vaccine is slated for approval to be used for 12- to 15-year-olds by next week.
On top of these, the company expects data from its third COVID-19 vaccine candidate. This recent trial is for a booster dose, which could have results by early July and possibly a full emergency approval later on the same month.
The company now estimates $26 billion in sales for the vaccine, which is notably up from its $15 billion projection in February 2021.
Pfizer is also confident in its capacity to manufacture at least 3 billion doses of the COVID-19 vaccine in 2022, with the company already negotiating agreements with countries for their 2022 supply and beyond.
While the huge boost in the company’s COVID-19 vaccine sales expectations definitely grabs headlines, Pfizer’s base business brought in notable results as well.
Apart from the vaccine, the company’s operational growth in the first quarter was mostly driven by the sales from its blood clot treatment Eliquis, which went up by 25% operationally.
Sales of its heart drug Vyndagel soared by 88%, while its cancer drug Xeljanz jumped 18%.
One of the most notable moves from Pfizer is spinning off its off-patent drug division, Upjohn, to form a new company with generic drug developer Mylan, called Viatris (VTRS).
This decision would rid Pfizer of several well-known products, such as Viagra, Lyrica, Lipitor, Celebrex, and Chantix, which were responsible for roughly 15% of its total revenues.
However, sales for these items fell by 30% in the first nine months of 2020 alone—a chronically falling performance since 2017.
By eliminating the products that no longer hold any exclusivity rights and signing them off to Viatris, Pfizer can focus on developing and marketing new and innovative treatments.
So far, this strategy has started to bear fruit.
At the moment, Pfizer has several attractive assets in its pipeline. One of them is non-small cell lung cancer (NSCLC) treatment Lorbrena, which could become one of the highest-selling products in the oncology market.
Lorbrena is estimated to grow to over $40 billion each year by the mid-2020s.
At this point, the drug is in its registration phase and was granted a priority-review status. That means approval is on the horizon in the not-so-distant future.
Other potential blockbuster oncology assets include prostate cancer drug Xtandi, NSCLC treatment Bavencio, and breast cancer medication Ibrance.
All these are in late-stage trials, which means they should be available to market soon.
In total, Pfizer currently has at least 33 drugs queued in either Phase 3 trials or registration. The list includes vaccine candidates, immunology treatments, and, of course, oncology assets.
While Pfizer lost Upjohn in 2020, it gained a new partner in GlaxoSmithKline (GSK). The two companies decided to merge their consumer healthcare programs.
This made them the biggest provider of non-prescription drugs across the globe.
By shedding its sluggishly growing assets, Pfizer managed to develop its culture into one that concentrates on developing and marketing new and innovative products.
Additionally, the company’s current portfolio holds several growing products with the potential for expansion.
Given all these changes, Pfizer raised its financial guidance for 2021 as well.
For this year, the company now estimates adjusted diluted earnings to be valued between $3.55 and $3.65 per share compared to the previous range of $3.10 to $3.20 per share.
In terms of its full-year revenue, the company raised it from its estimate between $59.4 billion and $61.4 billion to $70.50 billion and $72.5 billion.
In terms of its projected revenue compound annual growth rate, Pfizer reconfirmed that it could deliver at least 6% through 2025 and a double-digit growth on its bottom line.
Remarkably, this is still not taking into consideration its COVID-19 vaccine.
If you pull out the revenues from its COVID-19 vaccine, then the company’s projected EPS growth for 2021 is at 15%.
Adding the vaccine into the equation gives us an impressive 41% increase in its EPS.
If you consider the wild card that is Pfizer’s COVID-19 vaccine, which would include a price increase coupled with the possibility of booster shots administered annually, and combine it with its base business, then it’s easy to see how the company’s growth could be turbocharged in the next few years.
Mad Hedge Biotech & Healthcare Letter
April 27, 2021
Fiat Lux
FEATURED TRADE:
(THE FUTURE OF MEDICINE)
(CRSP), (VRTX), (EDIT), (NTLA), (PFE), (NVS), (GILD), (RHHBY),
(BMRN), (QURE), (SGMO), (CLLS), (ALLO), (BEAM)
Winning the Nobel Prize in 2020 provided biotechnology companies more traction on Wall Street.
The victory led to commercializing the 2012 discovery, Crispr-Cas9, at breakneck speed, with gene editing companies like CRISPR Therapeutics (CRSP), Editas Medicine (EDIT), and Intellia Therapeutics (NTLA) gaining considerable boost in their values.
Since then, the total market value for the products of these three has more than doubled in recent months to reach $23 billion.
Basically, Crispr-Cas9 functions like molecular scissors.
What makes this technology incredible is that Crispr-Cas9 can classify a single address out of 3 billion letters within the genome by using only a particular sequence. With this, we can repair thousands of genetic conditions and even offer more potent ways to battle cancer.
The market favorite among the gene editing companies so far is CRISPR Therapeutics, with $8.72 billion in market capitalization.
In comparison, Editas has $2.76 billion while Intellia Therapeutics has $4.15 billion.
CRISPR Therapeutics is currently working on a treatment that would implant tumor-targeting immune cells in cancer patients. The company is also prioritizing therapies that could edit cells to treat diabetes.
So far, it has made significant progress in developing treatments for a genetic disorder called sickle cell.
In the US alone, at least 100,000 people suffer from sickle cell disease, with 4,000 more born every year. Conservatively, we can estimate at least 3,000 patients availing of this one-time treatment at over $1.6 million a pop.
To date, CRISPR Therapeutics has five candidates under clinical trials for diseases like B-thalassemia, sickle cell disease, and other regenerative conditions.
It has four more queued, which target diabetes, cystic fibrosis, and Duchenne muscular dystrophy.
Compared to its rivals in the space, it’s clear that CRISPR Therapeutics is ahead when it comes to product development and trials.
Two of its candidates, transfusion-dependent beta thalassemia treatment CTX001 and sickle cell disease therapy CTX110, have already been submitted for clinical tests for safety and efficacy.
Recently, Vertex (VRTX) boosted its 2015 agreement with CRISPR Therapeutics by 10%, with the deal reaching $900 million upfront to push for quicker results in developing CTX001.
This is a crucial move for Vertex, but more so for CRISPR Therapeutics as CTX001 holds a highly lucrative addressable market.
The additional funding significantly widened the gap between the Vertex-CRISPR team and bluebird bio (BLUE) in the race to launch a new gene editing therapy targeting sickle cell disease and beta thalassemia.
To sustain its growth, CRISPR Therapeutics’ strategy is to develop drugs that only require mid-level complexity but can rake in generous financial rewards.
This is a similar tactic used by bigger and more established biotechnology companies like Pfizer (PFE), Novartis (NVS), and Gilead Sciences (GILD).
Evidently, this strategy is a great way to ensure cash flow.
Aside from its earning from the commercialization of these products, CRISPR Therapeutics can also attract larger companies to buy the intellectual property of their breakthrough treatments.
After all, startups generally get 100% premiums in contracts with Big Pharma.
Good examples of this are Novartis that bought AveXis and Roche’s (RHHBY) purchase of Spark Therapeutics.
The Roche-Spark agreement led to the first-ever FDA-approved treatment since gene therapy trials started in the 1990s. It was for the genetic blindness therapy Luxturna, which received the green light in 2017.
The second approved treatment was a muscle-wasting disease therapy Zolgensma, which was the fruit of the Novartis-Avexis acquisition.
Both conditions are rare, but the financial rewards are impressive.
At $2 million for each treatment, Zolgensma sales reached $1.2 billion annually. At the rate the therapy is selling, Novartis estimates that Zolgensma will surpass the $2 billion mark in 2021.
Novartis and Roche aren’t the only ones partnering with smaller gene editing companies.
Pfizer has been working with biotechnology companies BioMarin Pharmaceutics (BMRN) and UniQure (QURE) to develop a treatment for blood-clotting disorder hemophilia.
The COVID-19 frontrunner is also collaborating with Sarepta Therapeutics (SRPT) to come up with a treatment for Duchenne muscular dystrophy.
Gene editing has also served as the foundation for several biotechnology companies out there today like Sangamo Therapeutics (SGMO), Cellectis (CLLS), and Allogene Therapeutics (ALLO).
The market size for gene editing treatments is estimated to be worth $11.2 billion by 2025, with the number rising between $15.79 billion to $18.1 billion by 2027.
This puts the compounded annual growth rate of this sector to be at least roughly 17%.
While this is already groundbreaking with only a handful of companies knowing how to utilize the technology, the gene editing world has come up with a more advanced technique than Crispr-Cas9.
The technology is founded on the “base editing” or “prime editing” technique, which is the simplest type of gene editing that alters only one DNA letter.
So far, one company holds exclusive rights to this technology: Beam Therapeutics (BEAM).
When the technology became public, Beam stock has increased sixfold since its IPO in February 2020.
This latest development can resolve thousands of genetic diseases. However, it still requires further trials since “base editing” can also trigger damaging responses from the body.
Overall, I think CRISPR Therapeutics is the safest among these high-risk stocks.
The data from two of its candidates, CTX001 and CTX110, are incredibly promising. Plus, the added funding from Vertex boosts the confidence of investors that regulatory approval is well on its way.
The company is also capitalizing on the surging price of its stock and investing aggressively across different rare disease programs.
While the company has yet to be considered a major force in the biotechnology world, the potential multiple successes of its products could generate a company worth hundreds of billions.
This potential alone offers an investing opportunity with a substantial asymmetric advantage for its current share price.
However, bear in mind that the stock is still a risk and should be played as a long-term investment. Hence, you should buy on dips.
Mad Hedge Biotech & Healthcare Letter
March 18, 2021
Fiat Lux
FEATURED TRADE:
(A BLUE CHIP STOCK SELLING AT A DISCOUNT)
(LLY), (GILD), (REGN), (SNY), (AMGN), (TEVA), (NVO), (ABBV), (BMY)
It’s not unheard of in the biotechnology industry to watch the stock prices of small or even mid-cap drug developers rise and fall by 30% following trial results or new drug approval.
However, when the company is Eli Lilly (LLY), which holds a $179 billion market capitalization, then biotech investors need to pay attention.
After all, the only plausible conclusion to draw from this is that there have been some seismic advancements done by the company.
Two potentially breakthrough treatments are the culprit behind the volatility in Eli Lilly stock these days.
The first is Eli Lilly’s COVID-19 program, in which the company is looking into using Bamlanivimab (LY-CoV555) solo or combining it with Etesevimab (LY-CoV016).
What we know so far is that the combo drug can lower the risk of death and hospitalization among high-risk COVID-19 patients by as high as 87%.
In November 2020, the FDA granted Eli Lilly’s Bamlanivimab Emergency Use Authorization.
The solo treatment was also authorized for the same usage in Morocco, Europe, Canada, Rwanda, and some regions of the Middle East, where Eli Lilly is collaborating with the Bill and Melinda Gates Foundation for distribution.
Last February 2021, its combo treatment received the same approval.
To date, Eli Lilly has shipped roughly 1 million doses of Bamlanivimab and is committed to supplying an additional 1 million this quarter.
To meet the demand for the Bamlanivimab-Etesevimab combo, Eli Lilly will be working with pharmaceutical titan Amgen (AMGN).
In the company’s 2020 earnings report, Eli Lilly disclosed that Bamlanivimab accounted for $871 million of their sales.
For 2021, the market for COVID-19 treatments is valued at $27.25 billion.
Taking into consideration the competitors coming up with similar medications, such as Gilead Sciences (GILD), Regeneron (REGN), and Sanofi (SNY), the conservative estimate for the sales for Bamlanivimab alone is estimated to reach roughly $1 billion to $2 billion this year.
The second potential breakthrough that’s affecting Eli Lilly’s prices is its Alzheimer’s disease treatment, Donanemab.
Eli Lilly recently released positive data from the Phase 2 trial of Donanemab, with the treatment slowing down cognitive decline by 32% after 76 weeks.
In fact, a notable decline was already observed among the patients as early as 36 weeks.
This is an impressive result, and there’s talk that Eli Lilly’s plan of possible commercialization of Donanemab by 2024 could be fast-tracked to as early as the first half of 2023.
Interestingly, the positive news was met with negative reactions by the investors.
Eli Lilly fell by 9% following the Donanemab update, sending shares tumbling from $208.18 to $189.16.
This reaction effectively erased almost $20 billion in the company’s market value.
The negative reaction to Eli Lilly’s news may be stemming from the pending application of Biogen’s (BIIB) own Alzheimer’s drug, Aducanumab, which is expected to receive word from the FDA by June.
Investors anticipate that Aducanumab’s performance would be indicative of Donanemab’s future.
Looking at the trial results though, I can say that this shouldn’t be the case. Since the beginning, Donanemab has outperformed Aducanumab in practically every aspect.
Either way, what cannot be denied here is the market opportunity.
When the market thought that Aducanumab would get FDA approval in November 2020, the share price of Biogen saw a whopping 44% jump from $246 to $354 overnight.
Meanwhile, Donanemab’s potential sales volumes have been estimated to reach over $10 billion annually.
Other than Donanemab, Eli Lilly has been developing more contenders to boost its neuroscience division. Right now, this segment generates 6.3% of the company’s total revenues.
One of the promising drugs in the portfolio is migraine treatment Emgality, which recorded a 123% increase in sales last year to hit $362 million.
Thus far, Emgality holds at least 31% of the migraine market and still has room for growth and expansion.
This is a remarkable performance considering that its competitors include Amgen’s Aimovig and Teva’s (TEVA) Ajovy.
Another solid earner is antidepressant treatment Cymbalta, which generated over $768 million in sales last year, up by 5% year-on-year.
Outside its neuroscience efforts, one of Eli Lilly’s strongest growth drivers is its diabetes franchise.
This segment accounts for roughly 47% of its revenues and is led by Trulicity with $5 billion in sales last year, up 23% year-over-year.
Eli Lilly’s diabetes program has grown so much in the past years that it now aggressively competes against Novo Nordisk (NVO), a monopoly-like presence in this space.
In fact, Trulicity has been able to successfully protect its own market share against Novo’s heavily marketed Rybelsus, with data showing that users of Eli Lilly’s diabetes injectable recorded 60% adherence levels compared to Novo’s 43%.
In terms of expansion, Eli Lilly also won a new approval for Trulicity to be used to treat cardiovascular conditions as well.
This additional indication puts Trulicity’s peak sales at roughly $7.43 billion.
In an effort to corner the diabetes market, Eli Lilly also developed Tirzepatide.
Basically, this treatment is a long-term hedge against the pending loss of Trulicity’s patent exclusivity by 2027.
However, Tirzepatide is projected to surpass its predecessor in sales and reach double-digit billions.
Overall, Eli Lilly has positioned itself well in the diabetes market.
While it’s engaged in an aggressive battle for dominance against Novo Nordisk, there’s a lot of room for both.
The diabetes treatment segment is a continuously expanding market, with its value doubling in size from 2015 to 2015. Within this period, this market is projected to grow from $31 billion to $59 billion.
Aside from its diabetes and neuroscience programs, Eli Lilly has also been active in developing its immunology and oncology segments.
This is an ambitious plan, considering that practically all pharmaceutical companies are working on treatments in this space.
After all, the auto-immune market is massive as it’s worth well over $50 billion.
One of the bestsellers in Eli Lilly’s portfolio is plaque psoriasis treatment Taltz, which grew its sales by 31% year-over-year to reach $1.8 billion last year.
Some of the major competitors in this space are Bristol Myers Squibb (BMY) with Zeposia, Sanofi’s Dupixent, and AbbVie’s (ABBV) Skyrizi.
What could be promising news for Eli Lilly is the fact that AbbVie’s ultra-bestseller Humira is going off-patent by 2023.
This means that it could open up the market to allow both Taltz and Olumiant, another top-selling Eli Lilly treatment, to grab part of the lucrative market share.
Ultimately, Eli Lilly is a business that offers a promising commercialized portfolio and a remarkable near-term pipeline, which can reasonably support an annual revenue growth rate of roughly 10% even if we don’t factor in the effects of Donanemab.
Apart from the potential aftermath of the pending Biogen news, the fall in Eli Lilly’s shares could also be attributed to the extremely high expectation of investors.
Alzheimer’s has no approved cure, and there are only a handful of treatments developed from this neurological disease—none of which are even marginally effective.
It’s normal for investors to be wary of positive data results since they’ve been down this road before and are merely attempting to temper their excitement.
Amid the selloff, I believe that Donanemab is far from a lost cause. More importantly, I think the drop in Eli Lilly’s share price presents a rare buying opportunity for investors.
Therefore, I advise buying the dip.
Mad Hedge Biotech & Healthcare Letter
March 2, 2021
Fiat Lux
FEATURED TRADE:
(ANOTHER PLAYER JOINS THE ALZHEIMER’S DISEASE DRUG RACE)
(SAVA), (PFE), (HLUYY), (LLY), (AVXL), (CRTX), (BIIB), (GILD)
Over 5.8 million people in the United States live with Alzheimer’s disease, and there are at least 487,000 new cases recorded every year.
Sadly, there has been no new treatment approved for this condition since 2003.
It isn’t for the lack of trying though.
In fact, large-cap biotechnology companies like Pfizer (PFE), H Lundbeck A/S (HLUYY), and Eli Lilly (LLY) have tried their hands at coming up with a drug to treat Alzheimer’s disease.
Unfortunately, none of them succeeded.
Amid the failure of these industry giants to develop a cure, a small-cap biotechnology company based in Austin, Texas has emerged with a potential answer to the problem.
Cassava Sciences (SAVA), which has a market capitalization of $2 billion, is offering investors a different direction—and its efforts haven’t gone unnoticed.
Over the past 12 months, Cassava stock rose by a whopping 668%.
The overwhelming interest in the stock is understandable.
In February, Cassava released promising reports about its own Alzheimer’s drug candidate, Simufilam.
Patients who took Simufilam for six months showed 10% improvement on their cognition tests, while their dementia-related behavior improved by 29%.
The next stage would be for Cassava to go through Phase 3 of the study for Simufilam.
Interestingly, the success of Simufilam’s trials has not only benefited Cassava but also several smaller biotechnology companies working on Alzheimer’s disease treatments.
Specifically, Anavex Life Sciences (AVXL), which only has a market capitalization of almost $900 million, gained an impressive 129.4% boost.
Meanwhile, Cortexyme (CRTX), which has a market capitalization of $1.07 billion, rose by 57.8% this year following the positive data release.
While Cassava’s results are definitely worth looking into, it’s critical to understand the limits of the data the company has provided the public thus far.
My caution against Cassava at this point is not based on the belief that its Alzheimer’s disease program will fail.
Rather, I’m wary of the stock because its value right now is heavily based on the misunderstood perception that Simufilam has already succeeded.
Looking at the current data from the company, I believe that the skyrocketing price at this point remains unjustified.
It’s important to keep in mind that the FDA will not grant approval to a drug unless it shows satisfactory effectiveness in Phase 3 clinical trial.
A fairly recent example of a cautionary tale is the fanfare generated by Biogen (BIIB) when it released promising data for its own Alzheimer’s drug, Aducanumab.
However, this isn’t to say that Simufilam won’t make it, or that it will experience the same issues faced by Biogen.
This simply means that valuing this stock requires a more sober assessment. It’s challenging to determine its actual value right now with all the speculative fever surrounding it.
Remember, clinical trials for Alzheimer’s disease would set a company back roughly $1.8 billion on average.
It also typically takes more than four years to complete. At this point, Cassava only has approximately $94.3 million in cash.
This means it would need to either land a development partner to help shoulder the expenses or sell additional stock to come up with additional funds.
The Alzheimer’s drug market is massive, which is a clear indicator of the dire need in this space because there remain no reliable drugs available.
On the low end of the estimate, the global Alzheimer’s drug sales is projected to be $3.5 billion back in 2018.
On the high end, the number could reach $4.9 billion in 2013 to over $13.3 billion by 2023.
What are the prospects of an effective Alzheimer’s disease drug? Let’s go back to Biogen.
Its Aducanumab, which never managed to release impressive data, still estimated peak sales of roughly $4.2 billion.
Back of the envelope math says that an approved, safe, and effective treatment would undoubtedly generate blockbuster multi-billion dollar sales.
After all, large-cap companies pay a premium for exclusive rights to promising drugs.
To use an approved exclusive drug as an example, let’s take a look at the September 2020 deal between Immunomedics and Gilead Sciences (GILD).
Prior to the deal, Immunomedics developed an exclusive and promising chemotherapy drug called Trodelvy.
Like Aducanumab, that treatment was valued to rake in $4 to $5 billion in peak sales.
Seeing the potential, Gilead Sciences bought out Immunomedics to get Trodelvy.
The deal? It was worth $21 billion, or approximately 100x where Cassava trades when 2021 started.
Although it’s difficult to determine how much Cassava would eventually be valued, the sales for its Alzheimer’s drug should project better numbers than the regularly doubted Aducanumab.
The bottomline is this: Cassava is a promising stock that offers an Alzheimer’s disease drug candidate that reported better results than what the big players in the industry achieved so far.
Investors should expect volatility from this company in the next few months or even years as it enters a crucial stage: the Phase 3 trials, otherwise known as the drug development graveyard.
Global Market Comments
February 17, 2021
Fiat Lux
Featured Trade:
(HOW TO HANDLE THE FRIDAY, FEBRUARY 19 OPTIONS EXPIRATION),
(TSLA), (MS), (BA), (BLK), (GS), (AMD), (KO), (BAC), (NFLX), (AMZN), (AAPL), (INTU), (QCOM), (CRWD), (AZN), (GILD)
Followers of the Mad Hedge Fund Trader Alert Services have the good fortune to own no less than 16 deep in-the-money options positions, all of which are profitable. All but one of these expire in two trading days on Friday, February 19, and I just want to explain to the newbies how to best maximize their profits.
It was time to be aggressive. I was aggressive beyond the pale.
These involve the:
Global Trading Dispatch
- (TSLA) 2/$650-$700 call spread 20.00%
- (TSLA) 3/$600-$650 call spread
- (MS) 2/$55-$60 call spread 10.00%
- (BA) 2/$150-$160 call spread 10.00%
- (BLK) 2/$640-$660 call spread 10.00%
- (GS) 2/$240-$260 call spread 10.00%
- (AMD) 2/$75-$80 call spread 10.00%
- (BAC) 2/$28-$30 call spread 10.00%
- (KO) 2/$44-$47 call spread 10.00%
Mad Hedge Technology Letter
- NFLX 2/ $510- $515 call spread 10.00%
- AMZN 2/ $3,095- $3,100 call spread 10.00%
- AAPL 2/ $126-$129 call spread 10.00%
- INTU 2/ $340-$345 call spread 10.00%
- QCOM 2/ $135-$140 call spread 10.00%
Mad Hedge Biotech & Healthcare Letter
- (AZN) 2/$46.50-$49.50 call spread 10.00%
- GILD 2/ $57-$60 call spread 10.00%
Provided that we don’t have a huge selloff in the markets or monster rallies in bonds, all 15 of these positions will expire at their maximum profit point.
So far, so good.
I’ll do the math for you on our oldest and least liquid position, the Tesla February 19 $650-$700 vertical bull call spread, which I initiated on January 25, 2021 and will definitely run into expiration. At the Friday high, Tesla shares were at a lowly $816, some $53 lower than the $869.70 that prevailed when I strapped on this trade.
Provided that Tesla doesn’t trade below $700 in two days, we will capture the maximum potential profit in the trade. That’s why I love call spreads. They pay you even when you are wrong on the direction of the stock. All of the money we made was due to time decay and the decline in volatility in Tesla stock.
Your profit can be calculated as follows:
Profit: $50.00 expiration value - $44.00 cost = $6.00 net profit
(4 contracts X 100 contracts per option X $6.00 profit per options)
= $2,400 or 20% 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 February 22 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 machines do make mistakes. 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 understandably disappears, and the spreads substantially widen, when security has only hours, or minutes until expiration on Friday, February 19. 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.”
If for some reason, your short position in your spread gets “called away,” don’t worry. Just call your broker and instruct them to exercise your long option position to cover your short option position. That gets you out of your position a few days early at your maximum profit point.
If your broker tells you to sell your remaining long and cover your short separately in the market, don’t. That makes money for your broker, but not you. Do what I say, and then fire your broker and close your account because they are giving you terrible advice. I’ve seen this happen many times among my followers.
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 month-end.
Take your winnings and go out and buy yourself a well-earned dinner. Just make sure it’s take-out. I want you to stick around.
Well done, and on to the next trade.
