Monthly Cash Machine Newsletter, Thursday, 02/14/2008 09:03:09 PM ET
Option to cloe out MFX tomorrow and other final FEB cycle issues
by Steve Gail
HAVING TROUBLE PRINTING?
MFX alternatives for tomorrow:
The February cycle will be coming to an end tomorrow.
The MFX short Feb 50 call position is currently $1.99 in the money. If it closes
above $50 your MFX position will be called away. ( or you will have stock called away)
You have several ways to go for tomorrow:
FIrst: It MFX looks as it it going to close over $50 ( and there is a very good chance that it will)
You will need to do one (1) of the following:
First Option: You can close out the MFX 50 short call by buying it back anytime before the close tomorrow. The only downside with this option is that this option is thinly traded so the spread will not be $0.05 a part, the spread could be as much as $0.15 - $0.25 which is not the optimum situation to close out a short call , when buying it back
That is why we have another alternative:
Second Option: Because of the out of line spread that may exit on the above position, you might
You might consider that following alternative. You could wait until the end of the day and buy the shares of MFX instead of closing out the option, if the option spread is out of line. When you buy the shares, you will of course only do this, if the price of MFX is over $50. If that is the situation tomorrow going into the close, you would buy the shares 100 shares for each option contract you are short the MFX Feb 50 call.
At the end of the day you will owe for the shares of stock that you purchased
( over the $50 price ). Over the weekend the holder or the MFX FEB 50 call will
call the stock away from you at $50 a share ( 100 shares per contract).
Your loss will be the difference between what you purchases the stock for:
and the exercise price of $50 they called the stock away from you for:
You buy 1000 shares at $51.50 ( hypothetical price ) just before the close
$51,000 DEBIT. The buyer of the MFX FEB 50 call option you sold, will
exercise the option and call the stock away you paid $51.50 for ( or whatever
price you paid ). The option buyer will call the stock away from you at
$50 or 10 contracts = 1000 shares for $50,000
You purchase 1000 shares at close ( if over $50)
Example: You buy 1000 share at $51.50 = $51,500 debit
10 contract of the FEB 50 call taken from you for $50,000
You paid $51,500 for the purchase, you received $50,000 when the stock
is taken from you.
It is just like you bought 1000 shares of the stock for $51.50
and sold those 1000 shares for $50.00. Net loss of $1,500 in this case.
This option seems to be more intense, but not really as the exercise and your purchase will be done on the same day and thus the transaction is treated as a same day substitution. There are times when individuals will get exercised early and will have to buy the stock so that it can be called away.
Of course if the spread is fair, the first option is the easiest and the
Just remember, one of those options needs to be done before the close
tomorrow if the stock is selling above $50.
Of course, if the stock should be trading below $50 tomorrow. No action
would be warranted.
be sure to monitor any other position that might be close enough
tomorrow that a run up in the market could force you to close out that position.
Currently, the only position that fits that description would be BID ( closed
at $34.07 today. ) If that issue shoudl close or threatens to close about
$35, you might have to act to cloe out the short BID FEB 35 short call.
However, this will play out tomorrow. Just be sure to monitor all positions
in case "Murphy's law" should make an unexpected visit tomorrow.
Of course if BID cloes under $35.00 no action is needed. And in case, with a little luck MFX should close under $50, there would be no action needed.