Some posts in the past week piqued my attention but one I’d like to highlight is an article by The Simple Dollar. In this article, Trent has a reader with a question: should he keep his stock options? Well this post really hit home for me as options are a common form of compensation around here. I believe Trent pretty much nailed how one should go about deciding what to do:
If it looks like there’s still significant gas left in the tank for the company itself to grow, hold the options for now. You should wait until the instant your gut begins to tell you that the skyrocketing is slowing down or is over, then exercise the options and sell the stock.
There are also some thought-provoking comments to this post which added more perspective to this conundrum. Of course, I had to join in with my own response which I’m posting here:
If you already have a diversified portfolio and the options are tied to a strong public company like Google, then keep them. Even if it constitutes a huge portion of your net worth. Why do I say this? This is a once in a lifetime opportunity to score. You can multiply your net worth a ridiculous number of times by just sitting on options. Of course, if your assets are all riding on this one position then it would be a mistake not to diversify out of it. It’s worth keeping an “almost free” (something given to you outright) concentrated position in a hot stock/company if the rest of your finances are already in order.
Options are great because they are available to you at usually an incredibly low or no cost depending on the type it is. It’s such a great deal that you can consider it as having “windfall status” — of course, it’s a windfall that you’ve earned by virtue of being part of a company that wants to share its future with its employees.
If you’re sitting on options that have some value, you’re in a fantastic place and have a good problem in your hands! For every option package that actually is worth something, there are easily tens of them that turn out worthless. Being in this boat can be pretty nerve-wracking at times as your stock bobs and tumbles, but in my mind, there are a few methods you can try to help you decide whether to cash in or hang on.
A Few Ways To Handle Stock Options
By gut feel.
Whether you should exercise and redeem it all, partially or not at all — it’s all about weighing risk based on your personal situation. Being an “intuitive” type of investor means listening to your gut and measuring your risk tolerance. How comfortable are you with your overall situation? You’re an insider so you may be able to sense how things are going with your company better than anyone else. What does your gut tell you?
By approaching it analytically.
There are also other means you can try to help you make this decision, including one that provides you more analysis such as explained in this piece by Political Calculations’ Should You Keep or Sell Those Stock Options? With some simple mathematical calculations, you can figure out how your stock options stack up to alternative investments. If your options fall short, then you can consider selling them.
If you find yourself actually lucky enough to have accumulated a serious amount of paper money, then you may look into other avenues on capturing or locking some amount of profit. By discussing your plight with reputable financial institutions, they may be able to go over scenarios with you and offer hedging strategies you can apply because with employee stock options of a certain amount, more interesting wealth preservation strategies abound. And with that kind of money, there won’t be a shortage of financial reps that come knocking on your door once they catch wind of your “problem”.
And finally, if you do succeed in making out like a bandit with those options, make sure you read up on another article by The Simple Dollar that discusses how to deal with your multi-millions.
For more information, you can check out this CNN Money series on employee stock options. Best of luck to any of you facing this enviable dilemma.
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