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Old 09-22-2012, 09:49 AM   #21
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An insider trading violation is not an exposure in this situation. If the option holder were an insider, that would be registered at the broker that manages the company's options and they just wouldn't execute any transaction that is within the prohibited trading window.

The "do not trade" order can be a corporate policy that applies to a group of senior executives that are not insiders. In that case a violation becomes an employment issue, and the penalties can be loss of job, pension, vested options, bonuses, etc. Loss of livelihood and no lawyer can help.
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Old 09-22-2012, 10:08 AM   #22
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Originally Posted by Texas Proud View Post
Just my opinion, but if they were going after these types of trades, you probably would not have heard about it anyhow.... the small 'crimes' just do not make the paper (or I guess internet now)....


The other thing that the OP needs to be careful of is his DW's employer... I know that at my mega, if you traded outside the window you had a good chance of being let go..... think about it.... you have hundreds of thousands of dollars of extra compensation and you want to 'cheat' by hedging If I were your manager and heard about it I would say goodbye to you....
I was not suggesting that OP's wife should play with fire ( pun intended). I would never do that either. Rather I just wanted to speculate how common the small violations might be out there. Just for an example: My megacorp stock is currently in three separate stashes: indirectly through stock options, in 401(k) and other deferred accounts, and in my brokerage account. My megacorp obviously knows about the first two, but I have never told them about my brokerage account and I have never told my brokerage who my employer is and even if they knew about it there is no public information about who is formally considered an insider within my megacorp. How would SEC find out? Do they have access to every public company's employees' social security numbers and a way to link them to the ss# behind every single stock trade made? My megacorp average volume indicates that over million shares of its stock is traded during a average trading day and there are hundreds of companies with much larger volumes. Is there really a system that somehow looks into every trade done as a potential insider violation?
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Old 09-22-2012, 10:41 AM   #23
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This is a dangerous mindset that has allowed people to rationalize criminal acts. "Everybody does it", or "its small compared to what the big guys get away with" is a slippery slope.
Funny you are reading much more out of my comment than I thought I ever wrote into it.
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Old 09-22-2012, 10:56 AM   #24
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The other thing that the OP needs to be careful of is his DW's employer... I know that at my mega, if you traded outside the window you had a good chance of being let go..... think about it.... you have hundreds of thousands of dollars of extra compensation and you want to 'cheat' by hedging If I were your manager and heard about it I would say goodbye to you....
And at my mega, ALL options trading on company stock, except for exercising company-granted stock options within the allowed trading window, is *completely* forbidden at all times. The trading window closes 3 weeks before the end of a quarter, and reopens 3 trading days after earnings are reported for the previous quarter.

(Edited to specifically qualify my statement by referring only to employer stock.)
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Old 09-22-2012, 11:04 AM   #25
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When the trading window is closed, the option brokerage account is locked anyways and all trades will be denied.
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Old 09-22-2012, 11:07 AM   #26
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And at my mega, ALL options trading, except for exercising company-granted stock options within the allowed trading window, is *completely* forbidden at all times. The trading window closes 3 weeks before the end of a quarter, and reopens 3 trading days after earnings are reported for the previous quarter.
Wow that is the most strict policy I have ever heard of. I take that includes commodities as well? No hobby farmers selling cattle or corn with forward contracts work for your megacorp?
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Old 09-22-2012, 11:08 AM   #27
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Wow that is the most strict policy I have ever heard of. I take that includes commodities as well? No hobby farmers selling cattle or corn with forward contracts work for your megacorp?
No, let me clarify: All option trading on our company stock.

(Editing previous post to clarify.)
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Old 09-22-2012, 12:04 PM   #28
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I don't know whether SEC would pursue cases like this, but I do know someone who was immediately dismissed "with cause" for a similar breach of rules over a matter of only a few thousand dollars. They lost all unvested options, received no severance and were escorted out of the building.
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Old 09-22-2012, 12:14 PM   #29
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I don't know whether SEC would pursue cases like this, but I do know someone who was immediately dismissed "with cause" for a similar breach of rules over a matter of only a few thousand dollars. They lost all unvested options, received no severance and were escorted out of the building.
Unless there is evidence of acting on inside information, it's not a matter for the SEC or for pursuing criminal charges. In most cases, it's simply company policy regarding the trading of its securities, and the most they can usually do is fire you for violating it. It's generally not a criminal matter or one the SEC will pursue (absent extenuating circumstances).
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Old 09-23-2012, 07:07 PM   #30
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OP is talking about options that are worth of only a few hundred thousand. I could be way off but does SEC really go after "indirect maybe" kind of violators when they have their hands full with guys who are pushing the limits and making multimillion profits? Certainly I have never heard of anyone getting in trouble for playing with less than seven figures. I have never traded (directly or indirectly) outside of my window just out of the respect for my megacorp and people who insist they want me to still work there, but I have always thought that lots of this small stuff is going on and nobody ever pays attention to the small players.
Never mind the SEC. My former employer had an ethics compliance officer to monitor and chase down any employee who engaged in questionable practices. And yes, people were caught, fired, and litigated against, even for "small stuff". Doing any less was viewed as providing an environment hospitable to insider trading.

The nearest thing I ever did was to note a correlation between a major index and the company stock, and buy out of the money puts (long term, or LEAPs) on the index as a hedge on my stock options during a period where I was getting nervous about market valuation, back at the end of the last millennium. That was OK with the compliance officer. Puts on the company stock were expressly forbidden.
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Old 03-16-2013, 05:54 PM   #31
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I feel like I owe an update to all those who took the time to respond to my question.

Despite all the good suggestions above, we ended up doing nothing hedge-wise. DW's company stock went into a dive a couple of weeks after I posted the OP and by the end of November -when the trading window re-opened- DW's options were pretty much worthless. Darn.

But, we ended up being lucky. The stock price recovered after the fiscal cliff fiasco and when the trading window re-opened this week, we were able to cash in on DW's options -after double-checking with her company's compliance officer for good measure. We locked in a higher price than what we could have had last September so all is well. We just kept a small number of options as our "lottery ticket" in case the stock price really takes off. Phew. I'm happy to be off that roller coaster!
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Old 03-16-2013, 06:00 PM   #32
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Old 03-16-2013, 09:50 PM   #33
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Answering some of your questions will require a trip to the legal department. But basically, I don't want to take any chance and have the SEC knocking at my door.
It sounds to me two things are going on here. You really don't have the stomach for the volatility these options create, so you have two options - do not look at the stock price, and or sell (exercise) at least half the options once the trading window opens again.

Notice: I have been investing for over 30 years, and hedging is almost never a good option - it is only a way to lose money no matter what happens - if the market doesn't change or goes up you lose your hedge position, thus you don't get paid for the volatility you suffered. If it goes down, because of the nature of the hedge you usually don't make as much as you thought, and of course you lost your original option.

The only logical thing to do if you don't believe in your position is to sell it at the first opportunity.

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Old 03-17-2013, 01:04 AM   #34
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It sounds to me two things are going on here. You really don't have the stomach for the volatility these options create, so you have two options - do not look at the stock price, and or sell (exercise) at least half the options once the trading window opens again.

Notice: I have been investing for over 30 years, and hedging is almost never a good option - it is only a way to lose money no matter what happens - if the market doesn't change or goes up you lose your hedge position, thus you don't get paid for the volatility you suffered. If it goes down, because of the nature of the hedge you usually don't make as much as you thought, and of course you lost your original option.

The only logical thing to do if you don't believe in your position is to sell it at the first opportunity.

fd
While I generally agree that hedging a portfolio is mostly a waste of effort.
In this case it was the perfect place to use hedging. I assume the $200,000 was significant chunk of money to him.

If he could have bought an put option back in Sept that would have cost him say $10,000 but would have provide him protection for 6 months if value of their employee option dropped more than $40,000.

I pretty sure that their lives would have been less stressful last Nov and Dec. Ultimately they would have lost $10,000 they paid for the put options.

Now in this particular case, there probably wasn't great hedge and perhaps the insurance cost was too high. (Although the VIX is low so options are relatively cheap.) But he was trying to insure against a particular type of risk, company and/or industry, not so much a generic market is going to crash.

In many cases there are tax advantages for holding options so I think it really pays to look for ways of hedging.
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Old 03-17-2013, 04:31 PM   #35
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While I generally agree that hedging a portfolio is mostly a waste of effort.
In this case it was the perfect place to use hedging. I assume the $200,000 was significant chunk of money to him.

If he could have bought an put option back in Sept that would have cost him say $10,000 but would have provide him protection for 6 months if value of their employee option dropped more than $40,000.

I pretty sure that their lives would have been less stressful last Nov and Dec. Ultimately they would have lost $10,000 they paid for the put options.

Now in this particular case, there probably wasn't great hedge and perhaps the insurance cost was too high. (Although the VIX is low so options are relatively cheap.) But he was trying to insure against a particular type of risk, company and/or industry, not so much a generic market is going to crash.

In many cases there are tax advantages for holding options so I think it really pays to look for ways of hedging.
Since I am assuming they don't want to suffer the consequences of doing something illegal - and that trying to invest in something else that is not a true hedge is a dubious ploy at best - I stand by my original suggestion of selling whatever portion gets them back to being able to sleep well - at the next opportunity when they can sell.

fd
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Old 03-17-2013, 05:04 PM   #36
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Since I am assuming they don't want to suffer the consequences of doing something illegal - and that trying to invest in something else that is not a true hedge is a dubious ploy at best - I stand by my original suggestion of selling whatever portion gets them back to being able to sleep well - at the next opportunity when they can sell.

fd
And we did sell (see my last post). First time in 3 years that we were able to lock in a good price while the trading window was open so we jumped on the opportunity.
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Old 03-17-2013, 07:13 PM   #37
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An insider trading violation is not an exposure in this situation. If the option holder were an insider, that would be registered at the broker that manages the company's options and they just wouldn't execute any transaction that is within the prohibited trading window.
False. You do not have to be an insider (as reported to the SEC) to be convicted of insider trading. If you started buying a bunch of puts on your company's stock and it tanks, I would not be surprised if the SEC looks at you. You could argue that you were only trying to hedge your company issued options, but who knows what the SEC would believe. I bet they would presume you're guilty until you can prove otherwise.

If you run a printing press that prints 10Ks and you trade on nonpublic information, the SEC can prosecute you, successfully.

http://www.sec.gov/answers/insider.htm
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