What About Our Option Trade? Here is another exciting report on our option trade. If you recall, we sold 1000 qualcom put options for 80 cents per contract. As of this point, it has increased in value to $1.00 per contract. Since we are short these contracts, this means we would lose $200 if we bought those contracts back today. If the stock doesn't change in price before expiration date, we will have to buy 1000 shares of qualcom stock at $37.5 per share. Our acquisition price would be $37.5 per share minus the 80 cent premium we received or $36.8 per share. Since the current price is $37.26, that would not be a disaster.
Where Do We Go From Here? There are several things we can do. 1. We can buy our contracts back and lose $200. 2. We can stay where we are and risk that the stock will continue dropping and we will lose considerably more but we will have a chance to make up to $800 if the stock rises above $37.50. Again, there are other possibilities which we can discuss when they become more viable.
How Do We Decide? The first decision point is whether or not we want to own qualcom stock at $36.8. If the answer is absolutely not, we should buy back the contracts and look for the next deal. If we don't think that would be a bad acquisition price, we can consider holding the contract for the 16 days between now and the expiration date. To carry things a bit further, we should consider the intrinsic and extrinsic value of the contracts. As we said last week, the intrinsic value of an option is the strike price minus the market price or 37.5 -37.26 or .24. The extrinsic value of the contracts is the current price of the option minus the intrinsic value. In this case it is 1.00-.26 or .74. In a perfect trade, both the intrinsic value and the extrinsic value will be zero and the option will expire worthless, our ultimate objective. Since the extrinsic value is .74 and we know it will be zero at the expiration date, there is still considerable opportunity for profit. But what if the stock drops to $35 on the expiration date? At that point the intrinsic value would be $2.5 which would be 1.70 more than we received for our contracts and we would own a $35 stock for $36.70, a bad outcome.
Here's Another Definition. One thing we should look at is a term known as delta. The delta of an option is an approximation of the probability that the option will finish in the money. It has other uses but we don't need to go into that for now. As of this writing, the delta of our option is .51 which means that we have 49% probability that our option will expire worthless and we will get to keep the $800 we received. That is our ultimate goal.
So What Is the Bottom Line? My decision is to hold on for at least a few more days before I do anything. I still like Qualcom despite some negative comments by analysts and I believe the long term trend is up. Stay tuned.
Do You Have To Take Money From Your IRA This Year? I have several clients who had to take money from their IRA this year. Many are not all that happy about it. I guess you need to ask yourself why you put the money away in the first place. Was it to provide funds for your retirement? If so, take the money out and enjoy it. If it was to keep until you die so you could leave a legacy for your children, an IRA was the wrong vehicle. Your children will have to pay tax on that money at their tax rate. You could have left a life insurance or a multitude of other assets that they wouldn't have to pay tax on. If you have a large IRA and your income needs have been pretty well met by other means, you might want to consider a withdrawal even if you are less than the age at which you have to take it out. Saving for a rainy day is fine but as we approach the final quarter of our lives, the rainy day may be much be much closer than we think.
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