Bought-to-close MDT Jan 21 2012 $25 calls for $14.84
Bought-to-close GOOG Jan 21 2012 $510 calls for $126.20
Bought-to-close GOOG Jan 21 2012 $530 calls for $111.70
These are long calls I had purchased earlier. They still have ten months to expiration. I'm closing them and selling the calls to a new buyer. This provides a good example of why I like LEAP options.
I bought the $510 calls on GOOG in May 2010 for $91 per share. I'm now selling them for $126.20 per share, with ten months remaining until expiration. GOOG is currently selling around $613 per share. I could have exercised the calls, bought GOOG for $510, and resold it for $613--a $12 per share profit [ sales price - purchase price - premium = $613 - 510 - 91 = $12 ]. Instead, I sold the calls to a new buyer for a $35.20 per share profit [ sales price - purchase price = $126.20 - 91 = $35.20 ].
Here's the math for all three transactions:
GOOG $510 calls, exercising calls:
[ sales price - purchase price - premium = $613 - 510 - 91 = $12 ]
GOOG $510 calls, reselling calls:
[ sales price - purchase price = $126.20 - 91 = $35.20 ]
GOOG $530 calls, exercising calls:
[ sales price - purchase price - premium = $613 - 530 - 88 = - 5 ] <---NOTE THE LOSS
GOOG $530 calls, reselling calls:
[ sales price - purchase price = $111.70 - 88 = $23.70 ]
MDT $25 calls, exercising calls:
[ sales price - purchase price - premium = $40 - 25 - 8 = $7 ]
MDT $25 calls, reselling calls:
[ sales price - purchase price = $14.84 - 8 = $6.84 ]
This is a good example of why it's important to go through the math for each possible outcome of your options. For the GOOG $510 calls, a profitable trade was made more profitable by reselling the calls. In the GOOG $530 calls, a loss was avoided by reselling the calls. For the MDT $25, I would have made slightly more money ($0.16 per share) by exercising the calls. In that case, I chose to resell the calls because I'm already exposed to MDT through $35 calls I own and I'm no longer confident enough in the stock to justify that much exposure.
In each case, the calls began as multi-year LEAPs, and I've owned them for enough time to see if my investment thesis will play out. Longer expiration periods for calls tend to give more time to see results, are more flexible in providing a variety of profit-taking options, and are often reasonably priced for what you get.
