Redditor's Wife Inherited Long-Dated Google Call Options: What's A Prudent Way To Handle The Position?

A Redditor's wife inherited 130 Call options of Alphabet Inc Class A GOOGL shares expiring in January 2025 at an average cost of $7.37.

The user, titled u/WaitingToPretend, asked for thoughts on the positions on ‘r/Options' which received a significant number of comments and bits of advice from other users.

"I'm not super familiar with options and would be curious on everyone's thoughts on what to do with these? Is it worth just letting these ride for a while since they don't expire until 2025?" the user asked.

Also Read: Everything You Need To Know About Google Stock

The Positions: This is a very interesting case of long-term options where it's a battle between theta decay and price movement. The said options last traded at $6.35, according to data provided by Barchart. Considering a lot size of 100, the positions are worth about $82,550 as against the purchase price of $95,810.

It is noteworthy that for the options to be profitable, Alphabet Class A stock will have to close over the $147.37 mark as of the date of expiry in January 2025. At present, the stock is trading close to $94.57. The stock has lost over 30% over the last year.

A lot of users did provide some useful insights into how to manage the positions. One of the soundest pieces of advice included exiting the positions and using the funds to buy and hold the stock. Some even advised the user to trim the positions in order to avoid a potential loss and use the funds to invest in exchange-traded funds.

Arguments: In this particular case, one can argue quite strongly from both sides. One argument is that markets are currently hovering at a pivot point and stocks have seen their troughs. Going further, there is a fair possibility that Alphabet stock could easily rise above the $150 level in two years’ time.

Another argument is that given the stiff competition surrounding artificial intelligence, Alphabet stocks may remain under pressure and are unlikely to see a significant surge even if a bull market takes over.

Since the user claimed they are not too familiar with options, the best way to take care of the inheritance appears to be, as many users suggested, to exit the positions and buy the stock and hold.

Benzinga's Take: However, if the user thinks it is prudent to continue the positions, the best way to do that would be to create a hedge that would cover the initial cost of buying the options. This can be done by writing (also known as shorting) far-out-of-the-money Call options at a premium that would be slightly higher than the overall cost incurred.

Alphabet Class A options with a strike of $170 expiring in January 2025 last traded at $2.98. If one were to short these options with three times the quantity initially involved, it would lead to a significant premium collection. For example, the number of positions originally entered into stands at 130. If one were to short three times the figure, i.e. 390 options of $170-Strike on the Call side at about $3, it would lead to a premium collection of $117,000.

As a result, if the user were to hold the positions till the expiry in January 2025 and Alphabet stock closed at or below $140, the total profit incurred would be $21,190 as both the options expire out of the money and lose value. However, if the stock witnesses a significant surge in the meantime, a prudent step would be to trim the short bets accordingly.

The main disadvantage of executing this strategy is that it requires significant additional capital to maintain the margins utilized for writing options.

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