Google Option - What to do?

[Slug]

On Oct. 27 when GOOG was trading around 548, I bought a call option to purchase GOOG in June 2010 at 550 in my IRA. Since that time I've had the good fortune to watch its value rise - it's at 590 today. My problem is that in the context of my portfolio, this a large position, and it weighs on me a bit. I don't have a defined exit point which I know is a problem. I paid a little over $5k for the option. It's now up 40% valued at a little over $7k. A 40% and $2k return in about a month is of course a nice problem to have. However, it's an unrealized gain. I think the prospects for Google are good. I feel good about the stock and see little in the way of downside news coming (but I'm no expert), but the value of this bet is a little out of my league (or at least it feels that way). Also, there's no way I'll actually call the shares in June (I don't have $55k sitting around unfortunately). Just curious what others have done in similar positions.

PS My gut tells me to let it ride.

[wincrasher]

Bulls and bears make money. Hogs get slaughtered.

[Broken Arrow]

In two words, I'm thinking, "Trailing Stop".

Have an idea of how much you would like it to fall before you pull the trigger to protect a designated amount of gain you have attained so far.

At worst, you'll have your specified amount of gain. At best, the stop is unrealized and your option continues to grow in value.

By the way, what are your reasonings behind the feeling that Google will rise? Android? Chrome OS? YouTube? Or just that no one can match them in search?

[disneysteve]

In two words, I'm thinking, "Trailing Stop".

I think, without a doubt, that trailing stop orders are the most underused tools in an investor's toolbox. They allow you to be greedy without being stupid.

[Slug]

Wow, today is a good day. A trailing stop is a wonderful trading tool that I will implement on several securities. However, Ameritrade does not allow trailing stops on options. I will use a stop limit instead. Good feedback.

[Broken Arrow]

Sure, a stop-limit will work just fine.

[Slug]

Sure, a stop-limit will work just fine.

Yeah, the problem in general is the narrow increments available with option orders. It's easy for the bid to dip low and trigger a trade. That's my fear at least.

Do you know of a brokerage that offers trailing stops on option orders?

[Broken Arrow]

Yeah, the problem in general is the narrow increments available with option orders. It's easy for the bid to dip low and trigger a trade. That's my fear at least.

Do you know of a brokerage that offers trailing stops on option orders?

Sorry, but I know not. Regrettably, options trading is something I am still learning about.

An alternative is to use an alert instead. That way, rather than executing a trade, it will simply send you an email when it triggers. Most brokerages have alerts, and I am very confident that Ameritrade will too.

[KTP]

Not to hijack your thread (ok, a little hijack), but I would also like some advice about options and maybe a trailing stop.

My situation is a bit different because I didn't pay for thse options, they are through an employer. I have 5000 options of microsoft at $20 that expire in Feb 2011 and 6600 options at $26 that expire in June 2012. A few months ago they were all worthless, but now they are getting interesting (as of today microsoft is holding above $30).

Selling these options is going to push us well into AMT territory, so I don't know if I should spread it out over 2009,2010 and 2011 or wait and try and sell in 2010 or ???

I have some good feelings about the next earnings with Windows 7 and the holiday season, so $33 is not out of the picture. That starts to be some significant jack, and some significant taxes since these are treated as ordinary income when exercised.

What would you do?

[Broken Arrow]

KTP, I suspect your answer is going to require a bit more homework than what I can tentatively suggest while sitting at work, during the middle of a lull.

But, I would consider exercising some of the $26 options. That way, you can lock in that some of those gains, and the $26 is more "at risk" than the $20 ones if the stock prices should fall. Hmm, but the $20 expiration date are pretty close though.

Is there any way you can exercising a portion of it without going into AMT? I think the tax situation is what it really comes down to....

[Slug]

Do your 2009 taxes now assuming you sell nothing and then repeat adjusting for an option exercise and see if it kicks you into AMT. Painful but dependable approach.

[grand_canyon]

I don't think trailing stops will work on options due to the narrow range and big swings. I was facing the same issue on Ford options. Some profit is better than no profit and it's not fun having some profit and then it dips and you're watching the clock tick hoping it comes back. In hindsight, I could've made a lot of money on F but you just never know so I got out.

[Slug]

3 weeks later. Goog at 610 today. Still letting it ride. Up ~60% now. I'll be turned to bacon before it's all over. Oh well, go Android!

[Broken Arrow]

3 weeks later. Goog at 610 today. Still letting it ride. Up ~60% now. I'll be turned to bacon before it's all over. Oh well, go andriod!

At least it's the good kind of bacon where you're riding up, not the bad kind where you're 60% in the hole.

[Slug]

Final Update:

I was toast for quite a while. What was a great investment in the beginning began tanking. I didn't sell. I rode this $9k option (with a $4k gain) all the way down to a significant loss. Along the way down, I bought another one and watched it fall too. Greedy greedy greedy and highly undisciplined. Very dissappointed in myself. I was fortunate enough that this was a longer term option and it recovered. And, just this morning I was smart enough to get out with a $2k gain that I could have had back in December with far less risk and anxiety. If they just offered trailing stops on options, this would have gone much better. I didn't use the stop limit because of the narrow trading range, but I should have.

This latest GOOG runup is likely due to the upcoming earnings release. My guess is there will be selling on the news (which should be good news). However, it could keep running. That's fine too. I still own some shares which are far less anxiety provoking than the options.

So, the life lesson here is that stop limits and trailing stops should be an integral part of your portfolio, especially for volatile stocks. Take it from me, the angst isn't worth it.