A Funny Thing Happened On The Way To The Treasury

Looks like the United States Government is officially over it's debt ceiling limit. More interestingly, the world financial system hasn't come crashing down [yet]. Here are a few excerpts from today's Publication of Daily Treasury Statements. A footnote on page 7 informs us:

* Act of February 4, 2013 temporarily suspended the debt limit through May 18, 2013.

We find that rather funny in itself. Did anyone (even in Congress) actually know they voted to pretend we don't have a statutory debt limit? <waiving parts=hands>Ignore that, look over here.</waving> Moving along now, just above that line we are given an important piece of information:

Statutory Debt Limit    *    *    *    $ 16,394,000

Ok, I hope you aren't laughing yet, because here comes the real punch line. Just above that informative piece in the column labeled 'Closing balance today':

Total Public Debt
   Subject to Limit        $ 16,710,017

If you aren't accustomed to high finance and really big concepts like "national debt", look carefully at the two numbers. Which one is bigger, the statutory limit or today's closing balance?

Yes indeed boys and girls, your illustrious leaders have blasted right on past the national debt limit and spent an extra $316 BILLION of your hard earned money. And of course we are to believe they'll have it all fixed before May 18th

If you have access to this article on a smartphone, you might want to bookmark it and pull it out when some cop pulls you over for speeding. Showing her the details, assure her with, "It's ok officer, our federal government has provided precedence for putting aside the rule of law for the expediencies of the day." Then present your expediency and assure here no one is harmed by your driving, so you should both just go on your way as you'll be complying with the speed limit tomorrow after you've had time to fix things.

I mean seriously, you've just read this and that's exactly what you are going to do, right? No harm, no foul, screw the law. It's a dumb law anyway.

For more fun, mark your calendar to watch the security markets in the third week of May. Option expiration for May is on the 17th. You might want to buy those June puts now while they are cheap.

Get Paid To Move Your Positions

Normally if you want to transfer your securities from one account to another you have to pay a broker to do that for you. This is certainly a preferred method in taxable accounts, since selling in one and buying in another would trigger a tax consequence and possibly incur significant costs from commissions if you have a lot of positions to move. If your securities are in a tax sheltered account though, you can use options to move those securities and generate income rather than an expense.

Options sell at a premium. If the underlying price is $70.00 and you buy a put option with a strike price of $75, you can expect to pay more than $5.00 for the privileged of selling the position at a higher price than it is at the moment. You can use that to your advantage in this position moving scenario by selling the option in the account where you want the position to be at the same time you sell the underlying in the account you no longer want it.

Here's the dollars and cents of it:

Account A:
Sell 1000 XYZ for $70.00.
Income: $70,000

Account B:
Sell 10 XYZ front month in the money $75 puts for $5.30
Income: $5,300

At Expiration:
Assign $75 put.
Expense: $75,000

Net: $70,000 + $5,300 - $75,000 = $300.

Assuming you aren't doing business with Lame Broker's LLC, the $300 net gain should be well above the cost of commissions.

The key point is you need to make this move when the markets are stable and reasonably predictable so the underlying doesn't shoot up so much in price that your option does not get assigned (unless it is also desired that you be out of the position at the strike price anyway). The days immediately after earnings is a good time to do this as you will get a good idea of price direction, and most market moving surprises about the fundamentals of a company come out at that time.

CBOE Answers Your Questions

The Chicago Board Option Exchange is a great place for both option market data as well as education. Today's Ask The Institute question was a common question many people ask (even some of those who know the option market well), namely, what happens to my puts if the company goes bankrupt? Can I still exercise the option if the stock stops trading?

Check out the answer at Ask The Institute. It might surprise you.

If you want to learn the basics of options, you can also get some nice video tutorials on basic option strategies at the CBOE Online Media Center. Click the "Strategy and Education" link under the Channel Guide on your left.

Finally, if you want to get the same e-mail alerts and news that brought this to our attention, go to the CBOE login page. The "benefits" promo links to the sign up screen to create your own personalized CBOE home page.