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Re: Stock Options
Old 06-07-2005, 12:48 AM   #21
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Re: Stock Options

JB:

You are right.* I still have a nice basket of NQ options as well as restricted stock with my last employer.* Having done my own taxes every year, I noted that ISO' can be based on the value of when they are granted, and there can be a phantom tax event with them, that is taxes owed since the IRS considers certain ISO's earned at a date certain, based on the employers plan. You may elect to hold them to get a spread, or perhaps they will go down.* In one case you pay short term gains rate if sold under a year holding them, or long term for outside a year.* Same with restricted stock.* You own it once it vests, and owe taxes even if you have never sold any.* Its your stock and the IRS is taxing away on each dividend paid.*

Non-Qualified Options (the term comes from its treatment under ERISA), when sold as what the brokers call a "cash less" one day trade has always been best for me.* I sell the vested shares that were granted say at 40/share for say 60/share, and my gain is treated like regular income. Example, company grants you 500 shares at 40/each.* Two years latter you are fully vested and the stock is currently at 60/each.* You call the option in, in my case a broker that handles these matters under contract with my former employer.* I gross $10,000. (500 shares) ($20 gain/share over option grant value) = 10,000.

The company takes out the fees and I get a check for the difference.* I then put the money in a money market and forget about it till next tax season, since about 40% goes away as income taxes.

I always excercised any options as soon as they were about 25% above water.* My reasons included the clause in my contract that made them go away if I was fired for cause, the company went belly up, and the money in the hand theory.*

The business world is full of examples of paper wealth due to issued employee options going poof in a bad market.* Its a bad idea to excercise your options and then try to hold the stock afterward to ride it further up.* If it goes up, great, you make money, and you have plenty for the ever present IRS.* If, after you excercise an option, and take it as stock for holding after the date of excercise, and it goes down, even tanks to zero, the IRS will still base your gain at the difference between the grant price and the price when excercised, regardless of whether you took your proceeds in cash or stock.

I worked with a couple of guys who out waited the stock, betting it would climb higher, and they watched the stock climb to well over double the grant price, then crash so fast they were lucky in a days trading to net about 50% gain, but they still had bragging rights to my returns.

In the end my plan still worked.* So what If I only made 25%.* Since I had lots of shares, it was still in the money. I look back, and in some ways these types of compensation plans are the corporate version of "payday loans".* The company is writing a post dated paycheck in the form of options, or restricted stock, and you, the over worked employee, still give it all your best effort, since in 'just three years" you get this big payday.* I guess I treated these options like a post dated paycheck, since I had already put in the time and effort.* The faster you can cash these in, aside from NPV calculations, its still part of your comp, and it belongs on your side of the balance sheet.* If you really want to leverage this money, cash it in and work it with your portfolio. 8)
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Re: Stock Options
Old 06-07-2005, 12:59 AM   #22
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Re: Stock Options

I'd suggest talking to some people at your company who've been getting options there for several years, for advice.

If grant price is $40 and stock price is $50, and they just vested, I'm not sure I'd be jumping to exercise. Especially if the stock pays no dividend or small dividend.
With above #s, if the stock price goes up 10% over the next year or two, your gain on exercising with a same-day-sale would go up by 50%.

I'd also suggest reading the entire option instrument, and any other fine print given to you on your options.
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Re: Stock Options
Old 06-07-2005, 01:31 AM   #23
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Re: Stock Options

lazy:

Both ways work, but my way was based on my total compensation, and my own methods of risk management. I used my method of 25% and never lost a dime to expired options. Some who held out waited past the above water windows and watched their options sit under water and expire waiting to better the deal. I walked into ER in part due my options, bonus situation and other comp. As to fine print, being a lawyer I read every word and sent a copy of it to an ERISA lawyer who writes these plans. I considered it defered salary, not the lottery. I was in a very cyclical industry, and the stock could disappear below water and stay there longer than any Los Angeles class sub.

I wish you the best of luck with any options you have on hand, especially if you have got stock market timing down and use real money to back your bets. I do not second guess my trades. There will always be a low and high end to every deal. If I get my number on a trade, I made my market and the rest is financial noise. 8)
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Re: Stock Options
Old 06-07-2005, 10:12 AM   #24
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Re: Stock Options

Quote:
Originally Posted by JB
I have experience with both ISOs and Non-Qualified (NQUAL) options. If your options are above water, and represent a considerable sum relative to your other investments, excercise and sell them as they vest. If the stock goes down, you'll be glad you sold some. If the stock goes up, you'll have more options to sell later. If you think the company's stock will increase in value, try to negotate more option grants, and keep selling.

If the value of the options is small relative to your other holdings, and you think the stock may go up, you may 'let it ride'.

If you have NQUAL sell and excercise at the same time. If you have ISOs you might be able to benefit from long term capital gains if you hold after excercising, but you need to make sure that you aren't subject to AMT. If you do hold after excercising, make sure you do your homework. A mistake can be very costly.

I know dozens of people at multiple companies who were set for life, but 'believed in the company' and held onto options as the stocks slid in value past multiple trading windows. As each window opened, they thought that they couldn't sell, because the value was down, and would soon come back. Don't make that mistake.
Ding ding ding...we have good advice!
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Re: Stock Options
Old 06-07-2005, 12:13 PM   #25
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Re: Stock Options

Lex,

I'm sorry, I meant my reply to the original poster, Dreamer.

If my post was directed to you, the wording might have sounded a little insulting, as you were giving detailed advice and the OP was asking for advice. Didn't mean to be contradicting what you said, just expressing a few opinions to the OP. (The $40 vs $50 example was from a post by Dreamer. I see that it is also exactly 25% above water...)

I think that strategies for exercising options should vary greatly depending on the individual, the career, the portfolio, and the company issuing the options.

In some cases, exercising too early (such as with a stable, steadily growing, boring company that pays no or low dividends) may mean leaving a lot of money on the table, and in general those who hold on for years are likely to do much much better IMO.

In other cases, I'd imagine it could be a mistake to wait too long, such as certain situations with a high-risk stock, or one that pays out almost all earnings as a dividend, and offers little capital appreciation of the stock.

My advice about talking to experienced people at the same company is because I think such advice might be better tailored to the situation there, than our posts here.
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Re: Stock Options
Old 06-07-2005, 12:25 PM   #26
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Re: Stock Options

Dreamer,

No offense to any I hope, but I think the replies here on average might be colored too much by the recent bear market or tech market crash. It might be true that one should sometimes take the money in case it goes away should the stock tank, but I wonder if there's a bit of "fighting the last battle."

A very important factor is how long you expect to be at the company. My thinking assumes you expect to be there for 10 more years. If not (or if the options don't last that long) it would make much more sense to exercise early, in case you don't get another chance before you leave.
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Re: Stock Options
Old 06-07-2005, 03:56 PM   #27
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Re: Stock Options

lazy:

No problem here. I expect there was a real service recieved from those posting and reading this chain. Now that we are at critical financial mass from excercising our options, and our money is working hard to perpetuate our carefree lifestyles, its time for a tropical drink by the pool to contemplate the next fun filled adventure. 8)
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Re: Stock Options
Old 06-07-2005, 05:14 PM   #28
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Re: Stock Options

Quote:
Originally Posted by LEX
time for a tropical drink by the pool
Agreed.
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Re: Stock Options
Old 06-07-2005, 05:18 PM   #29
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Re: Stock Options

Quote:
Originally Posted by lazyday
No offense to any I hope, but I think the replies here on average might be colored too much by the recent bear market or tech market crash. It might be true that one should sometimes take the money in case it goes away should the stock tank, but I wonder if there's a bit of "fighting the last battle."
Gong...

The advice I gave was the strategy I used between 1993 and April of 2000. Full on bull market. Same thing I'd do today. Its simple diversity, divest yourself of vested shares and diversify. If the company stock continues to do well, super! You'll have more vesting soon! If the company starts looking like a texas armadillo by the side of the road thats getting john galts full dinner time attention, super! You got rid of it and diversified! If you love the type or category of business your company is in, then buy an index or an ETF in that business or class. In fact, when I was selling off my companies technology stock I was buying QQQ's. Until I felt technology had just gone way too far that is.
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Re: Stock Options
Old 06-07-2005, 09:41 PM   #30
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Re: Stock Options

Thanks again everybody. I have one last question regarding stock options. When DH stock was going up, there was a lot of talk about the stock splitting. That made me nervous, because I was afraid if it split, then the stock option would be worthless. For instance if stock was $70.00 and split to $35.00 and the exercise price was $62.00, then do you have to wait until the stock goes from $35.00 to above $62.00 before you could use the stock option? If so, then IMHO, the stock price would not make it back up before it expired.

This stock is not an initial stock offering and it is a pretty boring company that has been around for quite a while.

I need to read up some more and have DH check with his boss who I would think has had stock options in the past. Part of his deal with the stock options, require him not to let other employees no that he has them or he will forfeit them, so he could not ask anyone other than his boss.

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Re: Stock Options
Old 06-07-2005, 10:00 PM   #31
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Re: Stock Options

Splits halve the option price, so its all good. Splits are psychological anyhow.

By the way, check this out. Honestly I didnt read it through end to end but it looked like some interesting info.
http://www.stockoptionadvisors.com/nqsofaq/
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Re: Stock Options
Old 06-07-2005, 11:54 PM   #32
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Re: Stock Options

Quote:
Originally Posted by lazyday
No offense to any I hope, but I think the replies here on average might be colored too much by the recent bear market or tech market crash. It might be true that one should sometimes take the money in case it goes away should the stock tank, but I wonder if there's a bit of "fighting the last battle."
Actually, my strategy was developed in 1988 way before the bubble. It's worked well for me (and others) through multiple market cycles and companies. My .com buds were kicking themselves for not following this advice in 99,00 and 01.
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Re: Stock Options
Old 06-08-2005, 12:00 AM   #33
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Re: Stock Options

Quote:
Originally Posted by th
Gong...

The advice I gave was the strategy I used between 1993 and April of 2000.* Full on bull market.* Same thing I'd do today.* Its simple diversity, divest yourself of vested shares and diversify.* . . .
This is very similar to my experience and reasoning. There is some small upside potential to holding the stock and beating the tax man out of a few percent, but the downside potential is murder. And I know a number of people who experienced that downside. Unless you would want to buy that stock with any additional money that fell out of the sky and into your pocket, it is very difficult to rationalize keeping the options.
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Re: Stock Options
Old 06-08-2005, 12:08 AM   #34
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Re: Stock Options

Quote:
Originally Posted by - SG
There is some small upside potential to holding the stock and beating the tax man out of a few percent, but the downside potential is murder.
Five years later and the IRS is still repaying the 0% interest loan I gave them. At the rate they are willing to pay be back it will take another 10 years. I here noise that they may do something about this, but I'm not expecting much.
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Re: Stock Options
Old 06-08-2005, 12:15 PM   #35
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Re: Stock Options

Quote:
Originally Posted by - SG
This is very similar to my experience and reasoning.
I just got a call. Its snowing in hell!

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Re: Stock Options
Old 06-08-2005, 08:24 PM   #36
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Re: Stock Options

That is a very good site. Thanks everybody for the great information. I feel much more comfortable now. You guys are great!

Dreamer
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Re: Stock Options
Old 06-08-2005, 09:09 PM   #37
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Re: Stock Options

Hi,

Check out filing an 83(b). The tax benefits can be huge. On the other hand, you can do like I did and pay the accelerated tax only to see the company fail. Whoosh!

http://www.fairmark.com/execcomp/sec83b.htm
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Re: Stock Options
Old 06-09-2005, 09:53 AM   #38
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Re: Stock Options

Quote:
Originally Posted by Dreamer
Thanks again everybody.* I have one last question regarding stock options.* When DH stock was going up, there was a lot of talk about the stock splitting.* That made me nervous, because I was afraid if it split, then the stock option would be worthless.
Management would never screw themselves over this way.

If the stock price splits then the options adjust by the same ratio.

Splits mean absolutely nothing mathematically, but emotionally investors decide that the company is on to something good and they start buying. Statistically splits are good for an extra boost to a company's stock price, so this would be a good thing for your options.
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Re: Stock Options
Old 06-09-2005, 09:15 PM   #39
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Re: Stock Options

Here's to hoping that it splits!!! I just keep learning and learning from this site!

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