Sonki,
It is not a good idea to sell your option and buy up.
You should keep it and exercise it .
Say in April of 1998 when MSFT was at $85, the year 2000 $100 leap was
about $15 at that time, and you have $650k and wanted to own 10k shares of MSFT for long term investment, so you bought 100 contracts at that time for a total of $150k, and the most you will lose is 150k if MSFT went down below 100 in Jan 2000. But if MSFT went up to $225 in Jan of 2000, you need to dump anothe $500k
to exercise your 100 contract and the total value of the 10k shares at year 2000 is
$2.25 million , and you borrowed $500k to exercise that 10k shares. In year 2000,
most likely MSFT already had a 2:1 split and your total shares is 20k, and for each $2 up, you pay off your annual interest of $40000 ( 8% for a $500k loan) . Say in
year 2002 , most likely you own 40k shares after another split , and the stock price
will probably hit $150, so at that time, you sell 6k shares and pay off your loan of $580k after tax. So your total investment is 650k in April of 1998 and own 34k shares of MSFT in year 2002 and your max risk is $150k !!! |
