Employee Stock Options and Trading Strategy

Option Trading Topic: Employee Stock Options

Dear Options Trading FAQ:

I have a couple of questions on long-term options given as employee benefits. Particularly, 10-year options that are issued with a strike price that is equal to the current price.

How should they be valued? They can't be sold, so perhaps Black-Scholes isn't appropriate. What about looking at them as a 10-year, interest-free, tax-deferred loan that is invested in the stock?

If you are worried about a fall in the stock price (or non- movement in the next, say 1-2 years) after a big run-up, what should you do with these options? What about exercising them, putting the stock in a margin account, and then selling covered call options that are out of the money (or even in the money).

If you exercise the options and buy the stock, then you must hold for 1 year before you can sell (for capital gains purposes), or if you sell within 1 year, then it is taxed as ordinary income. Is there an options strategy (selling short against the box perhaps, although I don't exactly know what this is) that could allow you to take (or lock in) profit, without realizing the gain for a year?

Concerned About Dad's Stock Options

Dear Keeping an Eye on Dad's Dough:

This is a real sub-specialty that some brokers are experts in. If your dad wants professional advice, he should ask around his office to see who the others know and trust.

Basically, the question your dad needs to think about is: How long term a play do I want this to be? If he is a long term bull on his company's prospects (and why wouldn't he be?), he should consider just holding his options as they are. Why would he need to convert it to stock? Currently, he has a long-term bullish play at no capital requirement. Can't beat that.

If his take on the stock is grim, then he should not only cash in but brush off his resume too! As for cashing in, that is an area to get help in. Ask around. There are various ways to approach it depending on the tax consequences and such. Also, when the options come due, does he want to continue betting on the rise of the stock, cash it all in, or diversify his holdings? Lots of questions to think about.

There are many in the group who have stock options as a benefit (very common in high-tech companies). Maybe we'll get some input from them. Will pass on any info. Stay tuned, dear options trader.

Good luck and trade well! Remember, an educated options trader is the best options trader. Browse these books books on trading options.

Tags: Options Trading, Employee Stock Options, Options Valuation, Options Pricing

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