As I mentioned in my update on my portfolio, I have been holding HPQ stock even though it has been a complete flop. All of that changed Friday when I took a look at the option chains. I have previously mentioned that you can see how the market perceives a stock’s potential by taking a look at the option chains, and HPQ was looking dismal.

I needed the stock to hit $27.63 to break even and it is trading for $24.49, which would mean I needed a $3.14 a share run to break even. I also had completely lost faith in the stock and clearly the market was not feeling HPQ either. Just take a look at the option chain below.

HPQ Stock

$3.60 for a $23 call expiring Jan 19th, 2013. That is $1.49 in the money! Option chains like that tell me one thing, most people do think this stock is going up any reason amount from now until Jan 19th, 2013. Could it go up, certainly, but the market doesn’t think it will. Why continue to own $2,449 of HPQ stock when I could just throw down $360 and take everything over $23 dollars from now until Jan 2013.  What makes it even worse is the 2014 option chain.

HPQ Option Chain

Instead of paying $360 for the profits over $23 from now until 2013, I can pay $140 more extend it out until January 2014. Simply put, the options showed me that there were not many people thinking this stock could go sky high anytime soon. This is what ultimately motivated me to sell. Let me prove my point even further about option chains showing you how the market perceives a stock.  An apple option chain is shown below.

image

You want all of the profits from Apple stock from now until January 2013, its going to cost you $71 an option. That means the stock would have to go to about $656 a share to break even. This option chain shows that the market believes that Apple could go berserk sometime soon.

Even though I took a hit selling out of the HPQ position, I am happy that it is off my portfolio. There is no question that HPQ is not a “sexy stock” right now especially with all of the Apple related news now a days. Ultimately the option chains pushed me over, because if I do want to remain in a position in HPQ, I would rather buy an option at $360 (that is $149 in the money) than have my $2,449 at risk. However I don’t know if I have much faith in HPQ right now. Fundamentality I would still argue it is a strong stock, but that isn’t always what matters with stocks. I think if I was going to buy an option though, it would surely be the 2014 option.

Disclaimer: Always consult a financial professional for investment decision making. Do not use anything on epicfinances.com for decision making of any kind.

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