Strategy to Exercise Options

What are the termination conditions on your option grant? Many option plans say that any options not exercised within some amount of time after termination (90 days is not atypical) are voided.

-- Rich Carreiro snipped-for-privacy@rlcarr.com

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Say the option has a strike of $30, but the stock now trades at $60. Sell some shares, but buy calls at $60 strike. If the stock continues to rise, you are out the premium you just paid, but continue to participate in the rise. If it drops, at least you took some money off the table.

The other choice is to sell X% of shares each period over the life of the options. If there are 2 years left, sell 10% every 2 months or so, riding the up and down of the market.

The market always has risk, and options, generally more so. Joe

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Other than the (very valid) considerations mentioned previously you may also want to factor in taxes. Because your options are non- qalified they are governed under section 83, I believe. The earnings are includable in taxable income. As such, you don't want to go jumping into higher tax brackets and potentially crossing all manner of thresholds/phaseouts. If your stock options expire soon you may not have much choice, but otherwise keep the taxes in mind.

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When I sold some to install wood flooring, I saw my Roth IRA being almost totally phased out. It goes to show how much the middle class, even when once every now and then we strike luck, is crushed.

But I guess that paying taxes is better than seeing the options drown...

Thanks.

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What does this expression mean?

That's an idea.

Thanks.

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Speaking of corporate ethics, just get your Comptroller to redate the options to the lowest price for each year. I hear that works quite well. Chip

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They were forfeited after 90 days, all of which way underwater...

Thanks.

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?? If they were all forfeited, what is this question about?

When I referred to the $60 calls (your follow on question), I meant this; There is an active market in options for most actively traded public companies. The company options you got may not be bought or sold in the open market, but you can use the options market to implement a protective strategy. You have a (company issued) option with the price of $30. If the stock is now $60, you can sell through your company and pocket the $30. But then you look (through your broker or Yahoo, etc.) and see that the $60 call (the right to buy the stock at $60) by next december sells for $10. So you buy one contract (100 shares) and spend the $1000.

In this example, say the stock goes back down to $30. You made $3000, less the option you bought, so $2000 or 2/3 your potential gain. But if the stock went on to $100, that option is now worth $40, and you made a total $6000.

Joe

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A surprising number of people seem to simply exercise their in-the-money options at vesting, and sell the stock. As you probably know NQSO's trigger tax at exercise so if you hold the stock you take on the risk that it will drop in value, while still leaving you with a tax bill. So while you could hold the stock and pay the capital gains rate on further gains, those gains might turn into losses (as it sounds like they would have in your case).

There's no set answer though, you have to balance that risk of leaving money on the table with the risk of walking away with less, or nothing, because the options become worthless. It's a bit easier if you have multiple batches of options and/or unvested options (that you don't exercise) that would still allow you to benefit from any upside in the stock, despite cashing in some of your chips.

-Tad

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