Should I exercise Employee Stock Options, Or Hold Them ?

[stashing_it]

My wife has employee stock options, that are 75% vested.   If we were to exercise them right now, we could sell them for 9,000 plus 3,000 that isn't vested yet, for 12,000 total.

These options expire in 2023

When I look on yahoo finance, there are not publicly traded options that go out that far.  The farthest out date is 2021.    Call options at the same strike price for 2021 would be worth about 18,000.

That means that the options we have are worth about 12,000 in exercisable value, plus 6,000 in time value.

So my question is, should I exercise these options, for 12K, or continue to hold them?    I do not have the option to sell the options for 18k, only exercise or hold.    Nor am I interested in writing options outside this account to balance these out.  (I'm not even sure that is allowed by the company)

The options represent on the order of 1-3% of our net worth.

I understand "if you wouldn't buy you should probably sell"   And that is what I am doing with restricted stock.  The options represent more of a delimna for me because I can't realize their full value by selling

Thoughts ?

[maizefolk]

In principle the value of company shares should go up over time. On average this is true, but that's little consolation if you hold on to the options and it turns out that this particular chunk of time is one where your wife's employer's stock (or the market as a while) goes down instead of up.

So if you want to maximize your average expected return in the absence of any data, it would make sense to hold the options and exercise them only the day before they expire.

By doing this you're also taking on more concentrated risk, since individual company's stock are much more volatile than the market as a whole, and in particular you're double dipping on risk since a decline in the fortunes of your wife's current employer would both mean the options declined in value and also put her job security at risk.

If you want to make your worst-case-outcome less bad, it makes sense to exercise the options as soon as they vest.

Unfortunately no one else can tell you which is more important to your household, maximizing average return or minimizing worst-case-outcome severity.

[stashing_it]

Thanks, makes sense to me!

[mtnrider]

What maizeman said is correct.

It's also worth considering how much leverage you have in the options.  How much does an increase in the stock price increase the value of your options?

For example - if you have 100 options with a strike price of $10 and the current stock price is $11, it might be worth hanging on to them since an increase to $12 would increase your option values by 100% from $100 to $200 (paper windfall!). 

But if the current stock price is $100 an increase of 9% to $109 (similar percentage to the above example) gets you from $9000 to $9900, or only about 10%.  Considering the risk due to concentration, I'd think about selling.

Also remember that these are taxed as income, consider spreading them out over tax years, risk allowing.

[Goldielocks]

In my experience, if $12k is of significant use to you now, then sell.   If the amount does not really matter (because it is so small in comparison to your total assets), then taking the financial risk for more reward can work.

I have been issued stock options at two employers, my DH has had them at three employers.   My employers were very large, close to Fortune 50 companies, and DH's were smaller start up types in tech.   We have only made money on them once, for a smallish amount similar to the $12k you indicate.  It really sucks as the options were worth a lot more money for a while before vesting, for a couple of them, and one we actually bought and held, and it spiked up, but we did not sell in time and they dropped on a single news announcement (the CFO arrested in Germay for stock pumping a different company).  Which was a surprise to us, and impacted the share price, of course, depsite DH knowing that the sales funnel for his company was packed.

Anyway..  Stock options are not a guarantee.  Many companies issued them to more people thinking they were a great benefit after the first wave of people did very well with them, but the second round (you, maybe) will likely not have the same gains because past results do not indicate future performance, etc.
 

[FI-King_Awesome]

Regarding taxes... confirm with employer whether the plan is qualified.  If it is not, the gains are taxed as income.  In that scenario, assuming stocks always go up over the longer horizon, you would be better of exercising and holding, thereby only being subject to LTCG tax on the gains.

I recently learned this the hard way.

[chasesfish]

I've received both options and restricted stock.

Missed a window on the options and regretted it, the stock price only got back to $1 above the strike price by the time they expired (10 year options with a five year vest).

I've done better immediately liquidating my employer owned stock and putting it in an index fund.  I worked for a boring company.

[Car Jack]

I've done better immediately liquidating my employer owned stock and putting it in an index fund.  I worked for a boring company.

I always do this.  I worked for an exciting company.  Stock flew high, up to $140.  Went down to $13.  I joined the company and got a boatload of options at $13.  A year later 1/4 of the boatload vests and I sell at $38, pay off my mortgage, buy my wife a new Outback limited and pick up an HDTV (early 2000's, so $2500 for a sony crt).  Friend of mine waves off my conservative practice because the price is going back up to $140 for sure.  It dropped to $13, dropped to $10 and never came back.  5 years later, he's caught in a layoff and gets $0 for his shares.

If you're fine with all these options going to $0, go ahead and gamble.  Assume nothing.  I now get RSUs and they're set on eTrade to sell at vest.  If I have extra money (kids in college, so that's not a given, ever), I buy some more SCHB.

......and......hows the price this morning???