: Any thoughts on DOX and our January expiration position? I got in after you so my average cost on 80 contracts is $1.26. I was thinking about doubling up today, which would get me to about 91 cents but wondered what you thought about the prospects on your position. I wouldn't want to spend any more money if you were either optimistic of getting back to your exit point (much higher than mine) or resigned to writing off this play.
I understand that you can't offer any guarantees. I am just hoping for a little guidance.
: You can win multiple times with an option play and then be holding one that fails to rally and score a win in the time allotted. Last year I scored twice with
. But of all my recommendations this year, DOX has struggled the most, and after maintaining a perfect record of 91-0, it's time to push this one out further before the position expires in January 2009.
I have received a lot of email like yours. However, the majority of readers have already scored a win with this pick when the stock rallied in early November.
Like me, however, not everyone is happy with where DOX is right now. The play has backed me into a corner. Although I have faith the company will rally long term, it may not come before the third week in January.
There are three choices at this point.
1.) Ride it out and hope for a win before expiration.
2.) Roll the trade out to a longer position.
3.) Take the loss and reduce short-term capital gains on the year if sold before Dec. 31.
Now let me address each point.
The first choice is too risky. Within a month of expiration, if you still have faith the company will come around eventually, it is always better to roll the option into a longer position. As expiration nears, the value of the option will erode regardless of market conditions. Choosing to ride it out as expiration looms is never a good idea.
Depending on your tax situation, you should either roll the trade or take the tax loss. In this case, you want to do one or the other before the end of the year.
If you decide on choice two -- rolling the trade into a longer position - you will need to sell all your open contracts in the January 2009 $20.00 (DOXAD) and purchase another DOX option position with the proceeds. My recommendation is the January 2011 $17.50 (IOPAW). Initially, place an order to buy these with a good-till-cancel (GTC) price of $3.50 or better. But if the order is not filled within a week, place a market order and take the going rate. By rolling the trade, you take the entire cost basis of the current trade and defer your unrealized loss until you close the position.
This means your average purchase price needs to be recalculated to include the cost basis of the January 2009 position. In my case, I have banked heavily on the trade. Rolling the entire cost basis of all 580 contracts that are currently selling for 45 cents per share and moving them into a position that costs nearly nine times more allows me to purchase only a fraction of the contracts (one-ninth) with the proceeds. This is why I will set my GTC sell order for the options at 60 cents.
Each nickel that I can take away from this trade equals $2,900, and I am sure that within the week the options will be trading for 60 cents. If not, I will place a market order and sell them at the going rate. If I can get 60 cents per share for them on the way out, I can move $34,800 into the new position and buy 100 contracts of the January 2011 $17.50 at $3.50 or better by adding only $200 to the transaction.
Rolling a trade defers the loss, allowing more time for the position to come around and score a win. Check with a tax advisor to determine if taking a tax loss now in 2008 would be better for you.
If realizing the loss is a better choice, you should follow choice three: Sell the options outright and take the loss.
However, in order for the loss to reduce your taxable income you have to pay attention to the wash sale rules. If you have substantial gains from sale of securities and no losses to offset the gains, you may be in for a hefty tax bill come April 15. By selling off the position in 2008 -- realizing the loss and not reinvesting in the January 2011 positions -- substantial tax savings are possible.
The IRS does not allow you to sell securities simply for the tax loss. You are not allowed to take a tax loss on a stock if you sell and repurchase within 30 days (before or after the sale). According to the IRS, a wash sale results when "you sell or trade securities as a loss and within 30 days before or after the sale you:
1) Buy substantially identical securities;
2) Acquire substantially identical securities in a fully taxable trade, or;
3) Acquire a contract or option to buy substantially identical securities.
If you buy the same security 31 days before or after your loss transaction, the wash rule does not apply and you can deduct the loss.
There are, of course, special circumstances and exceptions that affect application of the wash sale rule. To learn how the wash sale rule applies to your unique situation, consult your
Lenny Dykstra manages Nails on the Numbers, a subscription service sold by TheStreet.com. Click here for a free trial. Dykstra writes regularly about options trades, in stocks like Halliburton, Cisco (CSCO) - Get Report, Intel (INTC) - Get Report, Texas Instruments (TXN) - Get Report and Applied Materials (AMAT) - Get Report for TheStreet.com
At the time of publication, Dykstra had no positions in stocks mentioned.
Nicknamed 'Nails' for his tough style of play, Lenny is a former Major League Baseball player for the 1986 World Champions, New York Mets and the 1993 National League Champions, Philadelphia Phillies. A three time All-Star as a ballplayer, Lenny now serves as president for several privately held businesses in Southern California. He is the founder of The Players Club; it has been his desire to give back to the sport that gave him early successes in life by teaching athletes how to invest and protect their incomes. He currently manages his own portfolio and writes an investment strategy column for TheStreet.com, and is featured regularly on CNBC and other cable news shows. Lenny was selected as OverTime Magazine's 2006-2007 "Entrepreneur of the Year."