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Strategies & Market Trends : Gorilla and King Portfolio Candidates
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To: ggamer who wrote (32601)9/29/2000 10:43:02 PM
From: Mike Wilhelm  Read Replies (1) of 54805
 
GGamer,

I would like to add one thought on excercising LEAPS; compare the amount you will "give away" in time premium by excercising vs. the amount you will "give away" in taxes by selling. Sometimes you may be better off to sell the LEAPS, pay the taxes, and immediately buy the stock.

In the example you gave, the time premium was 17.6% of the market value of YDSAL at today's close. [using closing bid of $62.25 on YDSAL, closing price of $111.313 on SEBL. Time premium was $10.937 ((62.25 - (111.313 - 60.00)); divided by market value of 62.25 = 17.6% of total. So by excercising you would have "given away" 17.6% of the market value of your investment in the form of a windfall to the lucky person who was short YDSAL and got to close out their losing position for only $51.313 (buy SEBL at 111.313 - 60.00 sale price to you).

To illustrate my point, I will make up an example of how much you may have "given away" in taxes. I will assume that the gain is long term, your marginal tax rate is 25% (20% federal + 5% state), and that your cost basis on the LEAP is $25. By selling at $62.25, you would have a taxable gain of $37.25. This means that 59.8% (37.25/62.25) of the market value of your investment is subject to tax at 25%, or in other words 15% (59.8% x 25%) of the market value of your investment would be "given away" in the form of a windfall to the state and federal governments.

Mike@forgivemeIwasanaccountantinaformerlife.com
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