Adjusting a LEAPS Position

Question - Adjusting a LEAPS Position

I own one Leap Call option (Jan 2014 AAPL @ 400) I paid $9,558. for the option. So my break even point is $400 plus the premium paid for the option. Apple is currently selling around $420.00 Is it possible for the Leap option to be called at this time? What are my options (no pun intended).

Answer

As owner of the call, you can exercise the option at any time. But it really wouldn't be to your advantage to do now with so much premium remaining on the call. If you exercise the option, your cost basis on those 100 shares of AAPL would be $49.50/share (the $95.50/contract you already shelled out + another $400/share corresponding to the strike price + commissions for exercising the call).

So in effect, you would be paying about $500/share for a stock that's trading right now at around $420/share. That's also your breakeven at expiration.

I'm not personally a fan of buying straight LEAPS - I actually wrote a page detailing the drawbacks amd why I don't buy LEAPS.

So it looks like you're down a bit on the trade to date - here are the choices I see:

If you believe AAPL will be trading above $500/share in 2 years, you could just hold tight and wait.
If you no longer see AAPL hitting $500 in the next 2 years, you could always close the position early and take a small loss now rather than a potentially bigger loss later.
You can go the adjusting a LEAPS position route by turning the trade into a calendar or diagonal spread by selling a near term call against the LEAP in order to collect premium which can be seen as a way to offset or reduce the premium you paid for the LEAPS call. This is just like writing a covered call except that instead of writing a call on 100 shares of stock, you're writing it on the LEAPS call.
You'd definitely want to run the numbers beforehand to make sure you don't inadvertently lock in a loss, but the way it might work (and this is an example, not a specific recommendation since I've never traded AAPL, don't have a strong conviction on the stock, and haven't even looked at the chart) is that it looks like you could sell an AAPL FEB 2012 450 Call for $5/contract.
If the shares stay below $450/share, you would "book" $5/contract ($500 cash) which would, in effect, reduce your original outlay to closer to $9K. That would then lower your breakeven down from $495.50/share to $490.50/share.
That might not seem like much, but theoretically you can keep doing this every month for the next 2 years so that it's possible that you get back everything (and maybe more) you originally paid to buy the LEAPS call.
As always, with options, there are always trade offs with how you set up a trade. There are potential drawbacks, of course, with adjusting a LEAPS position. If the stock craters, you're still going to be screwed. And what happens if the stock makes big move higher? Selling a near term call each month helps lower your cost basis and therefore your risk to the downside, but it can also cap your upside as well.