Stock Options

[Dreamer]

What can anyone tell me about stock options? I have had zero experience with them, but now have the need to know pros and cons of when to sell, tax info, etc. Is there a certain amount that they should go up before selling? My spouse says that you can just do a paper trade and no money exchanges hands, so I guess that would be short term capital gains? If you used your own money and kept them for a year, then you could have the long term capital gains. Any advice that you can give would sure be appreciated. They were going up and have since started going down again, so I hope that I have not waited too long. Thanks.

Dreamer

[TK]

I guess my advice is "I never invest in something that I don't understand."

Options can clean your clock if not understood and stayed on top of. Of course so can Las Vegas.

ScottTrade has a good definition of Options and how they can be used.

Also a google search on the term "Stock Options" will lead you to some good helpful information and strategies.

Good Luck .

[riskadverse]

I'm guessing you're talking about employee stock options not puts and calls. I've never been lucky enough to get any, but I do know that holding them after they have been awarded can lead to disaster. Something like they are valued at the fair market value on the day you exercise (purchase) them and you owe capital gains on that amount (less your cost). If they go down before you sell them. . .well you still owe the capital gains on that former amount. So the trouble people get in is their stock goes down alot. . . they finally sell, and they don't get enough profit out of the stock to even pay the capital gains. So paper millionairs end up in debt to the IRS and can end up bankrupt. I'm not sure this is all accurate, but you need to find out -- try (www.fairmark.com) That site is incredible concerning tax questions. Hope this helps.

[laurence]

riskaverse is exactly right. My DW is fortunate enough to work for a company that hands out stock options. They give you a price (hers was 2500@$9.00) and an accrual term (hers was 4 years). If it reaches a price you want to sell, you can (and should) choose same day sale, that way you excercise and sell instantly. You incure your tax burden at the moment you excercise, so if you hold the shares and it goes down, you could end up in debt to the IRS like riskaverse says. If we had tried to squeeze a little more out by holding for a year to avoid short term capital gains we wouldn't own our house or had started our retirement nest egg, as the stock took a dive after both times we sold.

[Spanky]

Treat a company stock option as if it is a stock that you are considering buying or selling. If the exercise price is above the current price, there is nothing to do. Otherwise, consider that you already own the stock and you are deciding whether to keep or to sell it. The decision should be based on valuation and not on tax consequences.

Spanky

[wabmester]

Quote:

Originally Posted by Spanky The decision should be based on valuation and not on tax consequences.

The tax consequences can be significant if you decide to exercise your options and hold the stock. I know one dot-com poster boy who exercised his options on about $100M worth of stock. He decided to hold the shares rather than sell. You know how the story goes. The exercise incurred a $20M tax liability, the stock tanked, the guy lost just about everything he owned and he got to know lots of people at the IRS really well.

Only you can decide when to exercise your options, but when you do, SELL -- don't hold, and stick the amount owed the IRS in a savings account (assuming your company doesn't withhold this tax liability for you).

[MRGALT2U]

Quote:

Originally Posted by wabmester The tax consequences can be significant if you decide to exercise your options and hold the stock.* *I know one dot-com poster boy who exercised his options on about $100M worth of stock.* *He decided to hold the shares rather than sell.* * You know how the story goes.* *The exercise incurred a $20M tax liability, the stock tanked, the guy lost just about everything he owned and he got to know lots of people at the IRS really well. Only you can decide when to exercise your options, but when you do, SELL -- don't hold, and stick the amount owed the IRS in a savings account (assuming your company doesn't withhold this tax liability for you).

Normally I would agree, but you know my story. I exercised, I sold, stock took
off like a skyrocket.

JG

[Spanky]

Wab,

I meant that once the decision is made to sell, do not hold the stock in an attempt to receive more favoritable capital gain tax.

Spanky

[cute fuzzy bunny]

I exercised and sold the same day as well. The benefit of spreading out the gains isnt worth the risk.

I sold every year at what I thought was a favorable price once the options became exercisable. Diversified into other stuff. The company stock kept doubling and doubling. I was a moron for doing that.

Then the stock fell from ~80 to ~12. I had just sold the years worth for 79 and change. My diversified holdings held up. Suddenly with the same strategy I was a genius.

Plan your work, work your plan. Sometimes it takes 7 years for the plan to clearly become a good one.

Sell every year, diversify, and maybe have some regrets in some years and pleasant happiness in others. Take the tax hit. Grin while writing the checks to the tax people because you've never written a check that big in your life. One year I wrote a check to the IRS for $280+K and one to the CA franchise tax board for over 100k. I spread the writing out into two days to really extend the pleasure. I thought "well, theres a new wing strut for a b1 bomber for the US, and the money to pay the same two guys in the CA state legislature that are in their 3rd decade arguing over whether to put a dam here or over there to continue another year".

By the way, the above advice presumes you have "NQ" or non qualified stock options. If you have ISO's (unlikely, as they havent been issued in a long time) the advice might be very different.

[HFWR]

My little piddling amount of options are so far under water I'd need Jacques Cousteau to find them...

[greg]

Quote:

Originally Posted by th I exercised and sold the same day as well. The benefit of spreading out the gains isnt worth the risk. I sold every year at what I thought was a favorable price once the options became exercisable. Diversified into other stuff. The company stock kept doubling and doubling. I was a moron for doing that. Then the stock fell from ~80 to ~12. I had just sold the years worth for 79 and change. My diversified holdings held up. Suddenly with the same strategy I was a genius. Plan your work, work your plan. Sometimes it takes 7 years for the plan to clearly become a good one. Sell every year, diversify, and maybe have some regrets in some years and pleasant happiness in others. Take the tax hit. Grin while writing the checks to the tax people because you've never written a check that big in your life. One year I wrote a check to the IRS for $280+K and one to the CA franchise tax board for over 100k. I spread the writing out into two days to really extend the pleasure. I thought "well, theres a new wing strut for a b1 bomber for the US, and the money to pay the same two guys in the CA state legislature that are in their 3rd decade arguing over whether to put a dam here or over there to continue another year". By the way, the above advice presumes you have "NQ" or non qualified stock options. If you have ISO's (unlikely, as they havent been issued in a long time) the advice might be very different.

My father said "Taxes are proof that you're doing something right." They're a good thing

[cute fuzzy bunny]

Quote:

Originally Posted by Have Funds, Will Retire My little piddling amount of optins are so far under water I'd need Jacque Cousteau to find them...

About all jacques is going to help you with is if your options are under 6' of earth.

Maybe phillippe can help you out

One of the big reasons why I decided to ER...well...decided to not work a while.

I had been getting 80% of my compensation from stock options and bonuses and still felt some days like I wasnt getting paid enough to put up with the bullpuckey. With my stock options underwater after that nice 80 to 12 price slide, bonuses looking iffy, and the offer of a separation package that offered a years pay and rehire after a year...it looked like a free one year paid vacation for the taking.

Then I discovered I didnt need to go back.

[prbob]

I will assume that you are talking about stock options issued by your employer. Generally, options are issued for a ten year period. There also may be some vesting period before you can exercise the full option. The option price is the stock price on the date they were granted. The option price is what you have to pay to buy the stock when you exercised.

If you think the company has good long term potential, you may want to wait out the 10 year period before exercising the option. If the value of the stock exceeds the option price, you could exercise the options. Most plans allow same day sale in that you exercise the loption and sell the stock so you have the money from the net prodeeds to pay taxes. If you exercise the option by buying the stock at exercise price, you will pay taxes on the gain in the year of exercise.

You could also consider if you think the company has good long term potential, exercising the option partially by buying stock and also selling some of the securites to obtain cash to handle taxes. So you might exercise 1000 shares and end up with 500 actual shares. If you hold these shares for one year, you qualify for Cap Gains treatment on the stock.

[Dreamer]

Thanks everybody for responding to me. Between church and my daughter's 2 dance recitals today, I have not had time to look at this until now.

DH was granted a Nonstatutory Stock Option of 1000 shares and he will be 100% vested 09/01/05. Right now he is 66 2/3% vested. The expiration date is in 2012. This was given to him by his company. (I have never been lucky enough to get them either since I work for the gov).

The stock went below the grant price per share almost as soon as he received it. We are not talking about a stock that goes up by great amounts. It is up $8 and some change from the grant price per share. It was $5+ higher than today, earlier this year.

He has received a bonus every year since he started working for this company, until this year. Since we don't have the extra income from the bonus, I thought tax wise, it might be a good year to exercise them. We don't need the money from them this year and I was hoping the stock would continue going up. As I said before, it is down $5 something from earlier this year. I would hate to see it go down below the grant price per share again, especially if it stayed there until the expiration date.

I will definitely do the same day sale when we exercise them. I did not even think of the stock going down and still having to pay taxes on the higher value. It makes sense, but my mind had not thought that through. That is why I wanted to run it by you guys. I will definitely go to fairmark and read also.

This board is such a great resource and I truly appreciate your help and expertise! Thanks everyone!

Dreamer

[BigMoneyJim]

Quote:

Originally Posted by Dreamer (I have never been lucky enough to get them either since I work for the gov).

Good thing, too. Most governments' balance sheets are horrendous!

[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.

[Dreamer]

You are right BMJ-I work for the fed gov and the balance sheet does not look too good!* I would be LOL, but unfortunately, I don't think it is funny!


TH-The Dreamer can't even dream of earning as much as you paid into taxes that year, not even with both my spouse's and mine added together. I really admire how you "came from nothing" and pulled yourself up. Good for you!!!

I think that I will definitely exercise and sell the same day. I am pretty cautious about financial matters. Just to make sure that I understand this right, if the stock is selling for let's say $50.00 and the grant price was 40.00, and you sold 500 shares you would clear $5000.00 and of course owe your taxes. Is my thinking correct? Is there anything I am missing? I don't think that we earn enough for the AMT and we did not itemize last year on our taxes. Normally, you want to DCA when buying stocks or mutual funds. Would it be better to DCA when selling your stocks also-for instance 100 shares this month, 100 next month and so on? If my thinking is totally flawed on this,please be kind.


Dreamer

[laurence]

Same day sale = short term capital gains, which gets counted as ordinary income. There is no advantage of DCAing, in fact, if it's at your target price, you should sell it all, IMO. Easy for me to say as DW's options were at $9 a share, and we sold at $60.

Otherwise, you have the concept down pat, Dreamer.

[JB]

Quote:

Originally Posted by Laurence Same day sale = short term capital gains, which gets counted as ordinary income.

I don't think this is accurate.

Please check whether you have ISO or Non-Qualified Stock options.

If you have Non-qualified, then the difference between your strike price, and the fair market value at the time that you excercise is treated as ordinary income and is subject to withholding and payroll taxes (it is not a capital gain). The fair market value is computed from the trading range on that day (either the average, or the closing price, can't recall). The diff between the FMV price, and your sell price is then treated as a short term gain or loss. This difference is usually very small if you do a same day or cashless transaction.

ISOs are more tax friendly, but also more complex. The diff between your strike price and fair market value isn't included in ordinary tax, but is included in the AMT calculation. This difference may trigger AMT.


You should read up on the consequences of excercising your options. Don't trust anything you read here. If you are unsure, then check with a professional.

[JB]

Quote:

Originally Posted by Dreamer Normally, you want to DCA when buying stocks or mutual funds. Would it be better to DCA when selling your stocks also-for instance 100 shares this month, 100 next month and so on? If my thinking is totally flawed on this,please be kind.

If you are holding on to a bunch of options that are above water, then selling some every month or quarter makes sense to me. Just don't get greedy, if the stock goes down, still sell.

If you have a some options and will be vesting an equal amount soon, then sell what you have now, and sell the rest as they vest.

If you have a great deal of convidence in the stock, you might consider holding onto some, but make sure that your next egg isn't dominated by one stock.