Author Topic: X Stock Options or X/4 Restricted Stocks  (Read 2381 times)

NumberCruncher

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X Stock Options or X/4 Restricted Stocks
« on: June 03, 2015, 12:28:01 PM »
So...if you were given a bonus in the form of either X stock options  or X/4 restricted stocks, what would you take and when would you exercise it?

Let's say the current value of a stock option is $10 and the current value of the restricted stock is $45. If we were to sell now, the X/4 restricted stocks would obviously be the better deal...but...should we sell now? We're in a fairly high tax bracket, so anything we got would be taxed at 28% federal, plus state. SO has been at this company a couple years now and FI is less than three years away. In FIRE we'd be in the 15% Federal bracket. The year we FIRE, we could make sure to do so early on in the year, significantly cutting our tax bill on the bonus.

There's a reason I automate everything else...this type of thing just makes me anxious and risk averse. This bonus is 5% of our NW.

MDM

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Re: X Stock Options or X/4 Restricted Stocks
« Reply #1 on: June 03, 2015, 02:21:48 PM »
So...if you were given a bonus in the form of either X stock options  or X/4 restricted stocks, what would you take and when would you exercise it?

Let's say the current value of a stock option is $10 and the current value of the restricted stock is $45. If we were to sell now, the X/4 restricted stocks would obviously be the better deal...but...should we sell now? We're in a fairly high tax bracket, so anything we got would be taxed at 28% federal, plus state. SO has been at this company a couple years now and FI is less than three years away. In FIRE we'd be in the 15% Federal bracket. The year we FIRE, we could make sure to do so early on in the year, significantly cutting our tax bill on the bonus.

There's a reason I automate everything else...this type of thing just makes me anxious and risk averse. This bonus is 5% of our NW.

It all depends on what the stock price does.  The more it goes up, the better the options.  The more it stays flat or goes down, the better the stock itself.  There is no way to "know" the correct answer now.  But one could have worse problems than having to make this choice.... ;)

The "sure thing" (provided the company doesn't go bankrupt) is the restricted stock.  The "speculative thing" is the stock options.  Take your best guess and good luck!

Cathy

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Re: X Stock Options or X/4 Restricted Stocks
« Reply #2 on: June 03, 2015, 02:37:53 PM »
Note that restricted stock is much different from RSUs, so make sure you understand what this actually is before making your decision.

adamwoods137

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Re: X Stock Options or X/4 Restricted Stocks
« Reply #3 on: June 03, 2015, 03:22:53 PM »
So...if you were given a bonus in the form of either X stock options  or X/4 restricted stocks, what would you take and when would you exercise it?

Let's say the current value of a stock option is $10 and the current value of the restricted stock is $45. If we were to sell now, the X/4 restricted stocks would obviously be the better deal...but...should we sell now? We're in a fairly high tax bracket, so anything we got would be taxed at 28% federal, plus state. SO has been at this company a couple years now and FI is less than three years away. In FIRE we'd be in the 15% Federal bracket. The year we FIRE, we could make sure to do so early on in the year, significantly cutting our tax bill on the bonus.

There's a reason I automate everything else...this type of thing just makes me anxious and risk averse. This bonus is 5% of our NW.

The market has an answer to this.  I assume by "current value" you mean the difference between the current price and the strike price.  If you mean the market value then I don't have any extra valuable information.  Otherwise I'd just look up the market value of an equivalent call on Yahoo finance.  For example,  if your wife works for GE I'd go to this page:

http://finance.yahoo.com/q/op?s=GE+Options

then, I'd punch in the right information about the options, then compare the respective values.  According to the efficient market hypothesis the value of the benefit should be reflected in the prices given on yahoo.  Regarding the taxes you should probably sit on it either way assuming the 5% of Net Worth doesn't include your home.

MDM

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Re: X Stock Options or X/4 Restricted Stocks
« Reply #4 on: June 03, 2015, 04:06:57 PM »
The market has an answer to this. 
According to the efficient market hypothesis....
"An" answer, but no guarantee that it is the correct answer. 

As the quote goes, “The market can stay irrational longer than you can stay solvent.”

NumberCruncher

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Re: X Stock Options or X/4 Restricted Stocks
« Reply #5 on: June 04, 2015, 06:49:20 AM »
Note that restricted stock is much different from RSUs, so make sure you understand what this actually is before making your decision.

Ah, it is RSU vs. stock options...

I clearly need to read more on this in the week or so we have to decide - any reading suggestions?

It all depends on what the stock price does.  The more it goes up, the better the options.  The more it stays flat or goes down, the better the stock itself.  There is no way to "know" the correct answer now.  But one could have worse problems than having to make this choice.... ;)

The "sure thing" (provided the company doesn't go bankrupt) is the restricted stock.  The "speculative thing" is the stock options.  Take your best guess and good luck!

It is a very good problem to have, agreed! It just makes me extremely anxious we'll make the "wrong" choice.

Leaning towards the restricted option as of right now...but then there's the choice of when to sell as well...

Regarding the taxes you should probably sit on it either way assuming the 5% of Net Worth doesn't include your home.

The NW does not include any home value.

adamwoods137

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Re: X Stock Options or X/4 Restricted Stocks
« Reply #6 on: June 04, 2015, 10:47:55 AM »
The market has an answer to this. 
According to the efficient market hypothesis....
"An" answer, but no guarantee that it is the correct answer. 

As the quote goes, “The market can stay irrational longer than you can stay solvent.”

I don't disagree but, my suspicion is that the market's answer is going to be far better than the average person's or even the average member of this forum's guess, since he didn't mention the companies fundamentals, and he didn't mention the black-scholes model, I'd definitely go with the markets answer.   Unless his crystal ball is good enough to not only tell the direction of the future stock price but also the future volatility he has no business trying to handicap the odds himself.  That being said 5% of your net worth in options sounds pretty scary to me.