I am not an experienced option/leap trader, so would welcome some advice.
I own 8 contracts (800 shares) to purchase Apple @ 320 which expires Jan 2013, this is now a long term options position. (My cost basis is $50,000)
I own 10 contracts (1000 shares) to purchase Apple @ 320 which expires Jan 2014, this is now a short term options position but would be long term in April 2013. (My cost basis is $270,000)
Also assume I have about $100,000 in short term capital losses available which I can use to offset some capital gains when I sell either options position.
I believe I would like to, at some point, exercise options to actually own 1000 shares of Apple stock as a long term investment, as well as to obtain ongoing dividends.
I am assuming a reasonable stock price appreciation through the end of the year, given the new products coming out and the seasonal factor. I am also assuming the long term capital gains tax rate will likely increase from 15% to 20% in 2013.
To actually exercise either the 2013 or 2014 options, I would need the cost basis and capital gains proceeds of the other in order to buy the underlying stock.
As I see it, my choices are as follows:
1) I sell the 2013 options in January 2013 prior to expiration for the Long Term profits, and just hang onto the 2014 options for a bit. Then exercise the 2014 options at some point in 2013 and thereby buy the underlying stock? OR
2) Instead I sell the 2014 options in January 2013, taking advantage of the time value gain component of those option as well, resulting in a short term capital gain (partially offset by the tax capital losses I have). Then use those proceeds to exercise the 2013 options and thereby buy the underlying stock? I believe the latter exercise would not be a taxable event and my cost basis in the stock would be the cost of the options ($50,000) plus the cost to exercise ($320,000).
3) Sell both the 2013 options in Jan 2013 and the 2014 options sometime after April 2013 (to get long term capital gains) and pay taxes on both gains. Then wait for a real correction in the stock in 2014 to purchase the shares outright?
I am leaning toward option #2 above at this point. For those experienced in options, what would you do? Any advice would be greatly appreciated.
(sorry for format but Yahoo doesn't allow me to space it better)
1) You don't get to pick when you exercise an option so exercising 2014 options in 2013 is not applicable
2) I can't #$%$ option two because I do not know when you purchased the 2014 contracts. I do not believe the cost basis of an option contract is factored into the price once exercised. If I am correct your basis would be $320 a share
3) This will work but I wouldn't perform the buyback. If the stock hits $800 a share in 2013 sell the options for long term gains and look elsewhere for greener pastures