Employee stock options and ESPP in your asset allocation Have a question about your personal investments? No matter how simple or complex, you can ask it here. This has begged the question about when to exercise these options.
I was tempted to use the stock's history and technical signals to time my exercise, but that seemed to be very un-Boglehead-like. I found this thread on the subject concerning Grok's rule on when to exercise: But as the stock has reached levels not seen since March , I am finding myself more and more anxious as the sell formula in that thread still tells me to wait.
Part of the issue is that formula doesn't directly handle multiple grants. Another issue with that formula is that it assumes deep in the money options, which effectively eliminates the volatility risk of those options. It's this volatility risk, particularly over the course of a few years, which my gut is telling me is not being properly accounted for.
At the risk of data mining in hopes of finding an answer I want, I thought maybe I should reconsider my strategy. I am now thinking that maybe I should include the vested options value in my portfolio, and limit it to some percentage. As I ponder this change in policy, I am realizing that it could have other repercussions. That's not such a bad idea now that they are solidly in the money, but it would be a dumb move if the stock is bouncing in and around the strike price.
That's why I am thinking more along the lines of some small, but non-zero percentage of portfolio allocation. In any case, I am sure that I am not the only person that has been or will be pondering these types of issues. Viewed as an asset Grok's rule would never have been activated.
More recently they required one year to vest, at which point I bailed out of the plan, but that wasn't for very many years anyway. He obviously couldn't answer them based on any inside information he might have, but he always gave the following advice: If the stock goes up after you exercise them, you can congratulate yourself for holding onto the rest of the options. If it goes down, you can congratulate yourself on locking in some profit before the fall. I could look back and say, "If I had held them all and exercised them today I would have made a lot more money", but I sure wouldn't have felt good about that decision two years ago when most of my options were underwater.
After being in the system for ten years, one ends up with a running scheme of options, one of ten being exercised each year, if it is in the money. The usual advice is to just stay on schedule. I have not heard of options in a deferred comp. I assume not spend it? I presume you work hard for these awards, it can be good to reward yourself sometimes Of course, don't cash them in if they aren't some net profit, but if they are cash them immediately.
Anything else is stock picking with a company you are hugely exposed to anyway, so bad on top of worse. What would you do with the money if you sold? The usual corporate MSO is an annual grant with a ten year expiration. Hi all, I have a received a series of employee stock options grants over the years, and it has gotten quite exciting as the stock has been rising steadily. The most efficient way to manage equity compensation, especially employee stock options, is to gradually sell calls.
Selling calls captures the "time value" and does not incur an early tax. Deposit stock or mutual funds or exercise a small amount of the ESOs for margin. Hold your ESOs to near expiration, unless you absolutely need the money earlier and have no other sourse of funds.
If you are in a higher tax bracket for Federal and State, there could be a considerable difference in your tax bill if at the sale of the company stock the bargain element is treated as ordinary income a disqualifying disposition or long term capital gain.
Hence, you'd need to think about whether you'd be willing to hold the exercised stock forat least one year it sounds like you've already met the 2 year requirement. For ESPP exercised shares, this carries the added risk that in a stock drop, you'd run the risk of paying tax on income you never received. If you wish to hold the stock for purposes of a qualifying disposition but your nervous about future stock price, you could, as mentioned, sell covered calls, but I think I'd prefer buying puts, at least to get you through the required holding period.
Clearly, there are a lot of moving parts here, and how you prioritize the risk factors will depend on your financial situation, needs and risk tolerance.
My wife was an officer and of course lockout periods. More lockout that open it seemed. Our reflections on this experience have led us to take a percentage off the table. Look at is as diversification. Just like investing, you should have a set plan and if conditions are good, execute the plan. Both in theory and in practice. Selling the year LEAPs can be better than selling 10 year calls, because even though the ESOs have 10 year maximum life, the expected life is perhaps 6.
As far as risk reduction, there is not a whole lot of difference and the nearer term calls erode faster. Also the year LEAPs offer more opportunities for capital gain loss harvesting. So in practice, avoid exercising early and sell calls to reduce risk and taxes and enhance the value of the ESOs. It does nothing to protect your downside. Plus their are bid ask spreads which are probably wide for individual stocks.
Plus you can't easily match employee options maturity date. Plus employee options often have blackout periods when you can't buy or sell.
What if you sell a naked call, the stock goes over the strike during a blackout period and it gets called away from you- you are now out of pocket. Then maybe the stock crashes back down by the time the blackout period is over. Buying puts would be nearer to the mark but still has some of the issues above.
Selling calls and sometimes buying puts is in practice far superior to making early exercises of ESOs. Unless you know a better authority to tell you otherwise, selling calls LEAPs predominantly is the best way to hedge employee stock options.
However, there are constructive sale concerns that may come into play and cause early taxes. For officers and directors, there is the additional concern for SEC rule compliances, of which I am sure that you are all aware.
There are also considerations of margin requirements, transaction costs and the concern that a short seller does not generally receive the interest earned on the proceeds of the short sale. To the degree that the ESOs are call like, then the better hedge is to sell calls, selecting the calls that have the most similarities to the ESOs. By doing so, you minimize the risks from delta, gamma and theta.
Since you will never get a perfect hedge you have to settle with the best you can get. If you want to protect against extreme moves, buy more puts, especially if the implied volatility is low. You can buy puts in an IRA and get more after tax negative deltas for less cash outlay. Firms will not let you sell naked calls in an IRA.
There are a favorable tax consequences for selling "qualified covered calls", so that is a consideration if you own stock in addition to ESOs. The fact that hedging delays the tax is a consideration when deciding to hedge or exercise. And I believe that the merits of diversification are overstated.
With all of the above in mind, it is generally better to hedge by selling at or slightly out of the money long dated calls and buy a few slightly in the money puts, always keeping your summed deltas substantially long.
There are companies whose plan documents do not prohibit hedging, but officials from those companies do not understand what hedging is and tell their employees they are prohibited when the are not. Good luck John Olagues [Commercial message removed by Mod. All posts 1 day 7 days 2 weeks 1 month 3 months 6 months 1 year Sort by: Author Post time Subject Direction: Board index All times are UTC No guarantees are made as to the accuracy of the information on this site or the appropriateness of any advice to your particular situation.More...