Buy/sell options for insurance on RSUs?

[EastCoastEric]

I recently took a job which comes with a large number of RSUs of the (publicly traded) company. The RSUs are distributed once a year over the next 4 years (25% each year) and will account for a large % of my overall compensation. I'll use fake numbers in the correct proportions:

Base: 100k
RSUs: 216k

Because the company trades with enough frequency I can buy/sell calls/puts for January 2017 as insurance to guarantee income. The numbers below are again in correct proportion. The options look as follows:

Current stock value: 100
...
Sell calls at 99 for 24.7
Sell calls at 105 for 22
Sell calls at 110 for 20.6
Sell calls at 115.6 for 17.9
...

...
Buy puts at 84 for 13.7
Buy puts at 88 for 15.8
Buy puts at 94.5 for 19.4
Buy puts at 99 for 21
...

Any recommendations? I don't have any reason to suspect the company would outperform or underperform the market. It seems like selling calls for 50% of the expected number of RSUs at 110 would be pretty reasonable as the company would need to rise 30+% in value over the next 1.5 years for it to not be worthwhile. Furthermore I would continue vesting extra RSUs in subsequent years if it does skyrocket. And if it underperforms, especially significantly, I can switch jobs. The risk I take is losing the job within the first year and not vesting any RSUs and leaving myself exposed. I should have enough liquid investments to cover a worst case scenario but it would be pretty awful.

Thoughts?

[greatrussian]

This may not be permissible under your employment agreement. Companies will generally restrict your ability to hedge the risk of a concentrated position in their stock since they want your fate tied to that of the company.  Something about making you work harder. (Actually it seems to discourage risk taking that can be beneficial to shareholders... but that's another story.)

If it is permitted - yes, options can be used to hedge the risk.

[beltim]

Any recommendations? I don't have any reason to suspect the company would outperform or underperform the market. It seems like selling calls for 50% of the expected number of RSUs at 110 would be pretty reasonable as the company would need to rise 30+% in value over the next 1.5 years for it to not be worthwhile. Furthermore I would continue vesting extra RSUs in subsequent years if it does skyrocket. And if it underperforms, especially significantly, I can switch jobs. The risk I take is losing the job within the first year and not vesting any RSUs and leaving myself exposed. I should have enough liquid investments to cover a worst case scenario but it would be pretty awful.

Thoughts?

Selling calls on shares you don't have in that account generally requires high-level options trading approval, and more importantly, a huge amount of margin - anywhere from 10 to 100% of the value of the stock.  Do you have that much margin available to you in that account?

[ZiziPB]

The risk I take is losing the job within the first year and not vesting any RSUs and leaving myself exposed. I should have enough liquid investments to cover a worst case scenario but it would be pretty awful.

This is your answer.  No need to go any further.

[EastCoastEric]

The risk I take is losing the job within the first year and not vesting any RSUs and leaving myself exposed. I should have enough liquid investments to cover a worst case scenario but it would be pretty awful.

This is your answer.  No need to go any further.

I can always buy puts with no additional risk beyond the initial outlay. What do you think?

I'll need to check my employment agreement to verify this is legal.

[SugarMountain]

I've similarly looked for ways to hedge company stock options.  I've thought about buying some puts or selling some naked calls (not really naked but from the brokerage house perspective they would be).  Our company recommends that we don't do this, but there are no rules against it until you're a VP or higher.  I could just sell everything that's vested, but I don't want to lose the upside and take the tax hit.  I've never been able to get the numbers to work out very well in my favor.  For one thing, the expiration of most of mine are like 4-6 years out.  Getting LEAPS that long are expensive.

[bacchi]

Write a collar. You can lock in the profits and protect against a substantial drop.

[clifp]

I think selling collars is a reasonable thing to do.  However, I won't do until you've actually been there a year and collected your first group of RSU for reasons discussed possible job lost and margin requirements, and also legal issues.  Think of options as insurance, if the level of risk you have owning a significant number of company shares makes you uncomfortable, then purchasing insurance especially when it is low cost makes sense.  But you don't actually have the stock today, and just as you won't buy auto insurance for the expensive car that your parents said they'd give you next year, until you took possession you shouldn't be worrying about collars now.

[seattlecyclone]

I think every company I've ever worked at has had a policy buried in the employee handbook somewhere that prohibited all employees from shorting the employer's stock or trading in options. Your new employer may be different, but I wouldn't bet on it.