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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: freeus who wrote (20436)	1/7/1999 6:22:00 PM
From: Gerald Walls	Read Replies (1) \| Respond to of 77397

It (the LEAP) is a 2000 and I was planning to sell the LEAP mid summer because of yr 2000 concerns or perceived concerns. But if I exercise I'll keep the cisco for a long time. Does it make sense to exercise anyway, or maybe just buy cisco itself on a dip (if there is ever one) and sell the LEAP this summer for a profit? Assuming this is the LCYAM's bid at 45-1/4, then you have a 30 point profit ($3000). Assuming 1/3 goes to taxes you'd pay 10 points if you sold now, but exercising just defers the tax and doesn't eliminate it. The strike plus the bid is 110-1/4, which means that there's about 6-1/2 points of time value. Exercising would "save" you 3-1/2 points short term but the whole 10 points of tax would be due when you sold the CSCO shares plus you lost the time value. To do it right you'd have to take the Net Present Value of paying 10 (the tax) now vs 16-1/2 (the time value forfeited plus the tax) paid later. I'd guess you'd have to hold several years to make it worthwhile. Since you're talking about a relatively small amount (in the same league with me) I'd say just sell the LEAP and buy the stock or roll the option this summer. If you were talking about dozens of LEAPs the answer might be different. Another reason to take action this summer or even now is that the time value erodes faster the closer you get to expiration or the more the stock appreciates. If you were going to hold "forever" then exercising would be better than selling the LEAP since the tax would never be paid as your heirs would receive a step-up cost basis on your death. :-) Unless Congress changes the death tax law. :-( Pardon my rambling.