Stock option...what is your guess?

[zoey]

I have a stock option that I need to exercise before May 1. It's tech stock: hpq, which is at between $43 and $44 today. hpq stock has been going down since December when it was up around $50.

Do you think I should exercise my option now and sell, or wait and see if it goes up before May 1? I'm hoping the stock price will go up, but afraid it's only going to get worse. I'd appreciate input. Thanks!

 

[megacorp-firee]

Questions are:
1)is this an option that you were granted at work?
Or was this an option you bought on the open market?
In either case,
2) what is the price you were granted it,
or the exercise price if you bought it?

If your grant price or exercise price is less than 43 then go ahead and sell for a profit. I think the market is sufficently volitile that I would not want to be holding it until May and see any profit evaporate.
... my 2 cents worth ... and worth every cent

 

[FIRE'd@51]

It's almost never optimal to exercise a call option early, since you will be giving away any remaining time premium. You will likely come out ahead by simply selling the call.

From the May 1 expiration date, I'm guessing it's an option from your employer, in which case you could effectively "sell" by writing exchange-traded calls against it.

Even if you ultimately want to be long HPQ, you are still better off waiting until May 1 to exercise because:

(1) Your potential loss is stopped out at the exercise price.

(2) You don't have to finance holding the stock between now and May 1.

If you want to lock in the current intrinsic profit (i.e. the in-the-money amount), you could always short the amount of stock covered by the option. This will effectively convert your call into a put at the same strike as the option you now hold. Of course, you will not participate in any further upside, but you will benefit if the stock goes below the exercise price.

 

[zoey]

Reply to Megacorp-Firee

Questions are:
1)is this an option that you were granted at work?
Or was this an option you bought on the open market?
In either case,
2) what is the price you were granted it,
or the exercise price if you bought it?

If your grant price or exercise price is less than 43 then go ahead and sell for a profit. I think the market is sufficently volitile that I would not want to be holding it until May and see any profit evaporate.

Answers:
1. Yes, this is an option that was granted at work.
2. $29 is the price when it was granted.

So, the grant price is less and I was waiting for the new year to exercise/sell it because I didn't want the profit to fall in 2007 since my income will be much lower (recently laid off) in 2008. However, I'm seeing stock prices falling since the first of the year. So, I'm looking for input on whether, or not, you think I should sell now, or wait and gamble that stock will go up before May 1. Thanks!

 

[youbet]

The bottom line to your question is actually whether we think hpq will go up or down from here. Who the heck knows? But since you're above water right now and the option expires in 3 - 4 months, I'd exercise now. The disappointment of not maxing your option gain is less than the disappointment of watching your options expire underwater!

Just to show you that you're not all alone in your situation where delaying exercising to save taxes cost you $$$, I've done the same thing.......... more than once! (Sometimes I wonder how I ever got FIRE'd!!!)

 

[zoey]

to FIRE'd@51

It's almost never optimal to exercise a call option early, since you will be giving away any remaining time premium. You will likely come out ahead by simply selling the call.

From the May 1 expiration date, I'm guessing it's an option from your employer, in which case you could effectively "sell" by writing exchange-traded calls against it.

Even if you ultimately want to be long HPQ, you are still better off waiting until May 1 to exercise because:

(1) Your potential loss is stopped out at the exercise price.

(2) You don't have to finance holding the stock between now and May 1.

If you want to lock in the current intrinsic profit (i.e. the in-the-money amount), you could always short the amount of stock covered by the option. This will effectively convert your call into a put at the same strike as the option you now hold. Of course, you will not participate in any further upside, but you will benefit if the stock goes below the exercise price.

Thanks for your response.

My stock option is at $29 per share. I don't have the available funds to buy it and hold it, so I plan to exercise/sell for the profit. So, what I'm wondering is do you think the hpq stock price between now and May 1 will go up, or down?

 

[Animorph]

No way we can predict the stock price, but this sounds like needed money for you. I'd get out now.

If not, you might see if "technical analysis" says anything about the direction of the stock price. It looks like it hasn't gone stedily down in 2008. Right now I'd be happy to get something over $46 for it. You could order a sell with a limit price of $46 and see if the stock recovers a bit. However, you might just watch it continue lower.

If expectations are good, the stock might go up a little just before HP's earnings are announced, which might be a good time to sell. If you wait until after earnings are announced, the price may go up or down and may stay at that level for a while. If they go down, you may not have a higher price before May.

I went through this with ISIL stock. There's no way you can exactly maximize your value, it's impossible without a lot of luck. If you are really conflicted about it, exercise equal amounts each month. Nothing wrong with that.

Dan

 

[growing_older]

This seems like a two step question.

First step, you wanted to delay exercising the option to get the taxable gain into 2008. You've already accomplished that.

Second step, you want to maximize your gain on HPQ.

So treat these like two separate transactions. First exercise the option and sell the stock at the current price today. You've used your option before it expires and got the gain into the right tax year. Hooray.

Second, if you believe that HPQ will rise from here in the next couple months, then take your proceeds and buy some. Personally I would never try to time a single stock over a short time frame like this, so I am personally not inclined to the second part of this transaction, but your approach may be different if you are a short term trader at heart.

 

[FIRE'd@51]

My stock option is at $29 per share. I don't have the available funds to buy it and hold it, so I plan to exercise/sell for the profit. So, what I'm wondering is do you think the hpq stock price between now and May 1 will go up, or down?

This is one of those situations where there is a 50-50 chance you will look back and wish you had done it differently. So let's look at an intermediate solution. If you like HPQ long term but don't have the funds to carry the position, consider the following:

HPQ closed last night at just under 44, so your options are 15 points in the money, or about 1/3 of the current price. You could exercise your options and sell 2/3 of the stock. This would raise enough money to purchase the other 1/3, which you could then hold for further gains.

 

[ERD50]

Another 'option' for you: Buy PUTS.

You can buy MAY HPQ puts at a strike of $42.50 for $2.65/share. HPQ now is at $43.75.

Pros: If HPQ dips below $42.50, these puts increase in value dollar-for-dollar, completely offsetting any loss (below $42.50) in your granted option. It also keeps your upside unlimited.

Con: It costs you $2.65/share. If HPQ does not rise more than that, you would be better off just exercising and taking the profit at current prices.

It is still a gamble, but you have paid the $2.65 to define your downside risk. Buying PUTS is just like buying insurance, it looks like you 'wasted it' if you didn't need it, but you are glad to have it if you need it.

As others have pointed out - you are asking people to predict the future movement in an individual stock. If anyone says they know that, they are lying to you, or lying to themselves, or doing something illegal.

I have been in your shoes several times - I ALWAYS exercised whenever there was enough profit to make it worthwhile. Never look back. Coulda-shoulda-woulda gets you nowhere.

$43.75 - $29 is a locked in $14.75/share gain, minus transaction and taxes. I'd be smiling all the way to the bank.

-ERD50

 

[FIRE'd@51]

Yet another "option" in addition to ERD50's put suggestion. Sell the May 50 calls for 1.20 to create a collar. Your downside risk will still be stopped out at 42.50 but your upside participation will be capped at 50. However, it will cut your insurance cost to 1.45 per share. This will guarantee you a sale somewhere between 42.50 and 50 minus the insurance cost of 1.45 plus commissions.

 

[youbet]

Hee...hee.....

You folks are offering zoey options he'd play if he had a feeling, one way or the other, up or down, about hpq's prospects. But he doesn't have a feeling or guess about that. Up or down is the question he's asking!

 

[FIRE'd@51]

Hee...hee.....

You folks are offering zoey options he'd play if he had a feeling, one way or the other, up or down, about hpq's prospects. But he doesn't have a feeling or guess about that. Up or down is the question he's asking!

C'mon youbet! It's hard enough to pick a stock; but to pick a stock and a time frame - well, that's beyond my pay grade!

BTW, I believe zoey is a she.

 

[maddythebeagle]

If he works there...wouldnt he have more of a theory than us anyway?

 

[youbet]

C'mon youbet! It's hard enough to pick a stock; but to pick a stock and a time frame - well, that's beyond my pay grade!

Awwww...... OK.

BTW, I believe zoey is a she.

Oooops! Sorry Ms zoey. My advise is the same. If you don't have a strong personal hunch about the direction of your company's stock in the next 3 months, just exercise your options and smile at your good fortune and........ don't look back or second guess yourself!

 

[clifp]

A collar does allow zoey to maximize the time value of the options. If this is worth the hassle is debatable.

I would also menition that if the stock options are incentive stock options (ISOs) there is a tax angle to consider. ISOs, which HP used to grant but I don't think they still do, allow the the different between the option price and the fair market value (i.e. 43.75) to be taxed at the long term capital gain if the stock is held for 1 year. The tax savings would be approximately $150 per 100 shares.

There are pros and cons of this are covered at Fairmark Press Tax Guide for Investors

 

[free4now]

I've considered this question many times while I had employee stock options. I try to avoid market timing, so I based my exercise decisions on other factors:

1. Overall portfolio diversification: When my options became a large percentage of my overall portfolio, I would be inclined to sell some to keep my overall portfolio volatility lower. And of course if the money needs to be counted on for use in the near future, you want it in something more stable than an option. Since we don't know the sizes of this option, you portfolio, and your income needs we can't make any recs about this.

2. How far above strike price the stock has risen: Once the market price goes above about 5-10x the strike price, the penalty in lost time premium for early exercise approaches negligible so might as well exercise early for diversification. Given that your strike is 29 and current price 43, you are far from this zone. So this factor indicates: HOLD

3. Taxes: You want to spread the exercises out into as many years as possible to avoid having the exercises put you in the highest tax brackets. Given that you only mention one option expiring on May 1, you can't use this strategy. So this factor indicates: Okay to SELL

 

[free4now]

I looked a lot at collars, puts and other strategies for hedging my employee options and in the end decided they were too expensive and too much like gambling for my tastes.

Their value is more as a psychological comfort than as a way to maximize your bottom line.

The decision of when to sell calls or buy puts is really a market timing move. People only start thinking about them when the market looks iffy. If you are going to be a market timer just buck up and make a decision about whether to exercise or not; don't complicate things with expensive hedges.

Also note that due to blackout dates and other restrictions, employee stock options are not callable and therefore not marginable. Therefore you would need to risk other assets to sell calls. Yech.

I'd probably advise you to exercise now if you are in any way counting on the proceeds in the next few years.

 

[FIRE'd@51]

A collar does allow zoey to maximize the time value of the options. If this is worth the hassle is debatable.

It does more than that. It puts a known range of potential realized profit on her position between now and May 1, i.e. approximately 41.05-48.55 before commissions.

BTW, I calculate that the time premium in zoey's option is about 0.40 per share, roughly the cost of financing the strike price for 103 days. The value of the insurance (i.e. the 29 floor) in such a deep in-the-money call is almost negligible over such a short time period.

As free4now says, setting up the collar would require margin due to the short "naked" call, although this margin could be other marginable securities in her account, and really doesn't involve any serious risk since she can always exercise her option before May 1 if needed to meet a margin call. Also, if this happened she would be realizing the maximum sale price of 50.

 

[free4now]

As free4now says, setting up the collar would require margin due to the short "naked" call, although this margin could be other marginable securities in her account, and really doesn't involve any serious risk since she can always exercise her option before May 1 if needed to meet a margin call.

At my company there were "blackout periods" right before quarterly results were announced, when the company wouldn't allow employee stock options to be exercised. If a call came due during this period it might be two weeks before it could be covered by exercising, and the market price might have changed unfavorably by quite a bit between the call coming due and covering it. So in that case you wouldn't have been successful in keeping the stock in the 41.05-48.55 range.

 

[FIRE'd@51]

At my company there were "blackout periods" right before quarterly results were announced, when the company wouldn't allow employee stock options to be exercised. If a call came due during this period it might be two weeks before it could be covered by exercising, and the market price might have changed unfavorably by quite a bit between the call coming due and covering it. So in that case you wouldn't have been successful in keeping the stock in the 41.05-48.55 range.

The exchange-traded options we have been discussing expire May 17. Her employee options expire May 1, so she will have exercised them by then, more than 2 weeks in advance of the announcement of HPQ's 1Q earnings (assuming HPQ has a 2-week blackout period), which I believe will be around May 20. Since she doesn't have the funds to carry the stock, she will just have to unwind the options position at that time, but I don't see how her profit falls outside of the 41.05-48.55 range. If the stock is below 42.50, she exercises her put. If her call is assigned early, she will get $50 per share for her stock.

 

[megacorp-firee]

Questions are:
Answers:
1. Yes, this is an option that was granted at work.
2. $29 is the price when it was granted.

So, the grant price is less and I was waiting for the new year to exercise/sell it because I didn't want the profit to fall in 2007 since my income will be much lower (recently laid off) in 2008. However, I'm seeing stock prices falling since the first of the year. So, I'm looking for input on whether, or not, you think I should sell now, or wait and gamble that stock will go up before May 1. Thanks!

IMO, you have to figure out what you are trying to accomplish.
1) get profit into 2008. Check!
2) make maximum profit. ? what does that mean?

1st, you have plenty of good advice and recommendations on how to proceed from others.

For some reason, I get the impression that you are not a fanatical student of the market (I could be wrong). So some of those recommendations might be a little daunting to you. As well as somewhat risky.
Also I think you are looking for the magic bullet, less filling/more taste. IMO, it does not exist.

Now that you have fulfilled objective #1, you now have to figure out if you are happy with the $15 or so profit that you have so far (yes I know it was more last year, but that was last year) or if you want to [-]gamble[/-] hold the options until May, or do one of the other strategies that have been suggested (options, puts/calls, ...etc.).

IMO, if you lock in the $15 or so now, unless you want to own HP for a longer period, you should just take the dough and DCA it into your AA, using index funds.
If you want to own HP or try and maximize it, why I don't know, then you could use one of the suggested recommendations. You choose how much you want to risk/make and that will determine which recommendation.

Analysis; the company stock (HP) is incentive pay. Don't treat it as an investment. Cash it in and run your plan. No one on this board can guarentee you that the stock price will go up before May.