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)
