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Timing of exercising stock options
Old 08-26-2014, 11:19 AM   #1
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Timing of exercising stock options

We been accumulating stock options via dw employer. The earliest they will start to expire is 2020. Some have vested others are slowly but sure vesting. We have exercised some vested options to pay for some major home improvements, not plan on exercising any more until right before they expire to unless we need to tap into some major cash for large expenses. When we have exercised they automatically hold taxes at ~33% or thereabouts.

? is - at what point or is there a point in time that it make sense to sell and cover the taxes and hold them, sell to cover, etc., before the expiration date of the vested portion of the grants?

Or do as we have been doing exercise at will when needed?


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Old 08-26-2014, 12:02 PM   #2
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ISO or non-qualified?

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Old 08-26-2014, 12:29 PM   #3
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We have non-qualified stock options. We have been doing same-day-sales whenever the trading window is open and we can get a good price. Recently, we set up a 10b5-1 plan to exercise and sell a pre-determined number of shares at pre-determined prices whether the trading window is open or not. Personally, I don't like to sit on options until right before they expire. I want to exercise them when it makes sense for me to do so, not when I am backed into a corner and have no other choice. I also rarely do sell-to-cover because we need to divest away from that one stock.
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Old 08-26-2014, 12:44 PM   #4
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The other pieces of information that would help are:
- Approximate scale of grant
- Strike price
- Current price of stock

Your view as to the riskiness of holding the stock.

If you have ISOs and the stock is stable (is any stock stable?) and/or has good long term outlook there can be a significant tax advantage in holding until the appreciation becomes long-term capital gains.

For non-quals there's no such benefit, and the decision of when to exercise becomes purely a stock timing decision.

If you expect the stock to keep appreciating, then deferring exercise makes sense. If you think there's risk in the stock's future, locking in your gains now may make sense. Some hybrid may make sense as FIREd suggests in order to diversify.
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Old 08-26-2014, 01:23 PM   #5
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I always vested and sold the moment I could because I simply did not want to have so much of my net worth plus employment tied up in one company. Did I pass up some gains? Yes. Did I avoid some losses? Also yes. On balance I probably left more money on the table than I gained with this strategy, but honestly I would follow it again in an instant - the peace of mind was important, the diversification of risk was important, the psychological feeling of shedding dependence on one company was important. But this is a personal subjective preference rather than an objective science.

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Old 08-26-2014, 02:00 PM   #6
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Originally Posted by ulrichw View Post
Your view as to the riskiness of holding the stock.
This matters a lot in my view. I know no one is a perfect seer as to how their company is doing. On the other hand, you probably know more about your employer than pretty much any other company. So you opinion counts.

So while it's not prudent to have most of your assets tied up in company stock/options, it's not a bad thing to let a portion of your options ride for a while if the company is doing well and run in a way you are comfortable with.
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Old 08-26-2014, 02:20 PM   #7
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If you leave the company, you will have 30-90 days to exercise. So, to plan on ER next year for example, this becomes tricky because one could hold on to them only to see value dropping before ER.

One hedging strategy is to buy puts as an insurance, so you can wait until ER date.
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Old 08-26-2014, 03:44 PM   #8
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In fast moving company where stock can go anywhere (up or down) year to year, I opted to cash in a fixed amount once a year. It worked for me. Some fared better by market timing. Others didn't cash in any before the company was acquired by another megacorp and stock options became worthless. I came in at somewhere in the middle. I didn't make huge amount of money but cashed in enough to beef up my RE fund. Your mileage will vary depending on what you are after.
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Old 08-26-2014, 04:05 PM   #9
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Really depends on the type of options you have.

If they are RSU's the moment they vest I would sell. I had options that vested every year and was uncomfortable having that much $$$ tied to one stock...even if it was a good company.

ISO's are slightly different. If they were in the money when they vested I usually exercised and sold half and let the other half ride as we had a ten year exercise period. My last set of ISO's were literally worthless for 8.5 years and then all of the sudden bang...stock had a good run and I had a nice last check that I exercised the day before they expired!
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Old 08-26-2014, 04:07 PM   #10
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I started cashing in mine about a year before I ER'd. My intent had been to cash them in over 5 years or so but I ended up ER'ing about 4 years earlier than planned. The stock was quite volatile so I would cash some in when the stock was up rather than on a fixed schedule.

When I decided somewhat suddenly to ER in October 2010, I realized that the combination of stock options (only about 25% were above water at the time) and deferred compensation was going to drive our taxes astronomically higher for the year. So I considered waiting until January, then realized that my BS bucket was so full I was happy to pay the taxes. My contribution to reducing the national debt.
"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute." William Feather
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Old 08-27-2014, 12:03 AM   #11
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As a related aside, I had a small number of stock options my last year before ER working at MegaCorp. I had 90 days after termination to exercise them. I was already thinking of immediately establishing residency in Texas before moving abroad, independent of tax reasons. This would theoretically save me the California State income taxes if I exercised those options after Texas residency.

However, someone later pointed out to me that California (and many states) have a law that you still have to pay them income tax on those stock options, even if you have established residency somewhere else before cashing them.
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Old 08-27-2014, 05:41 AM   #12
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thanks all for your replies. to answer some of the ? - options vest over 3 years. we also get rsu's that vest after a year. for the rsu's generally we have liquidated after they vest. we also have espp that we liquidate every year once they hit that long term basis. as for the options are plan has always been to wait until few years when they expire which is 10 years. we try to keep our company stock to ~10% or less of total portfolio. grant price was ~mid 30's back in 2009 we exercised at a price of ~mid 60's couple years. decision was made to exercise to turn our unfinished basement into the most expensive play room for our kids w/ a small wine fridge as a bonus.

question stemmed more b/c we have options that were granted at high ~30's and ~low 40's and the price of the stock has been hovering int the low ~100's. These and subsequent options won't start vesting for another 5+ years.

seems after your responses and re-reading some older post it is best to hold until vesting period or close to it.

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Old 08-27-2014, 09:11 AM   #13
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Originally Posted by fh2000 View Post
If you leave the company, you will have 30-90 days to exercise.
Do not assume that - check your grant carefully - I can only exercise mine up to the day of my termination.
If I die or get fired at 11:59PM my options go "poof" (not a big concern since they are seriously under water)
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Old 08-27-2014, 10:05 AM   #14
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My recommendation would be to forget the tax issues. Focus on risk. Weigh the expiry dates with the stock price movement.

Stock options afforded us a very comfortable retirement. We exercised them on a ladder as the stock increased in value. In our case we had $15-22 options and exercised at 42-53. The stock went to 54, then dropped like a brick to 12. There was a lot of money on the table for me and I was not prepared to risk my early retirement. And it was 'found' money.

A number of my associated did not cash their options, or cashed very few. Often because of the tax consequences. Ultimately most of their tax issues went away with the stock price reduction-ie under water.

I was fortunate. Out of about 40,000 options only 7500 went under. We were given a three year window in which to exercise after we retired. We kept the money as cash and were able to take advantage stock market crash.

At the end of the day my question was always....if I had this money would I invest this much with this company. The answer was not-not because of the company but because of my desire to diversify my equity holdings.

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