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A Note on Options Called Away | The Mesh Report

A Note on Options Called Away

John Thomas April 19, 2017 Comments Off on A Note on Options Called Away

A number of you have been receiving notices from your brokers warning that your short call position in the SPDR S&P 500 ETF (SPY) April, 2017 $227-$230 in-the-money vertical bull call spread may get called away.

They are specifically referring to the short April $230 calls.

Brokers have recently started doing this to avoid getting sued for failure to give notice, which they always do.

While it is theoretically possible that your April $230 calls could get called away, it is highly unlikely.

Let me do the math to show you why.

The SPY is currently trading at $233.60. The April $230 calls are trading at a mid price of $3.86, which expire in two trading days on April 21st.

The April $230 calls have an intrinsic value of $3.60 ($233.60 – $230.00 = $3.60). So The April $230 calls are therefore trading at a $0.26 premium.

If the holder of this call exercises his position he will lose the entire $0.26, worth $962, plus his exercise costs. So it is highly unlikely that the holder will exercise the position.

Having said all that, weird stuff happens on options expiration.

A call owner may need to cover a short position right at the close today and exercising his April $230 calls is the only way to cover it.

There are thousands of algorithms out there which may arrive at some twisted logic that the calls need to be exercised.

And yes, calls get exercised by accident. There are still a few humans left in this market.

All of these fun and games happen right at the market close.

In the unlikely event that your April $230 calls ARE called away, this is what it will cost you.

Your SPDR S&P 500 ETF (SPY) April, 2017 $230-$233 in-the-money vertical bull call spread which you bought for $2.65 is suddenly worth $3.00. You get to book an instant profit of $1,295.

If your calls ARE called away, this is what you do.

Call your broker and tell him you want to exercise YOUR long $227 calls to meet the short position in the $230 calls. This is a perfect hedge.

This exercise process is now full automated at most brokers, but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.

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.

SPY is the largest ETF in the world, currently with $226 billion in assets under management. The next two largest ETFs that track the S&P 500 are iShare’s IVV and Vanguard’s VOO—currently with $91 billion and $57 billion in assets respectively.

If for some reason the market sells down sharply over the next two days, I will stop out of this position quickly.

You never want to be caught in a situation where your long April $227 call position is well in the money, but your short April $230 call position has expired worthless.

That could leave you with a ton of stock, which you definitely don’t want to own in this kind of jittery market.

Want to know what John Thomas REALLY thinks?

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