After being a regular reader of this forum, I am finally taking the plunge and doing my own AAP. :)
One question that came across my mind is that should I consider stock options that are given to me as a performance bonus? Obviously this stocks are my own company stocks and the options alone constitute 40% of my stock portfolio.
Should I sell my stock options now and rebalance my portfolio and so that my company stock is under 10% of my overall stock portfolio or just ignore the whole stock options thing? My first of the stock options are expiring in 2012 and I plan to R2I in 2010-2011.
Thanks.
Should I consider Stock Options as part of my AAP?
Should I consider Stock Options as part of my AAP?
Yes, stop options should be considered as part of AAP. You may consider only the net value of the options. ( market price-strike price )
Look at this way, if you have cash will you be investing it in your company so much ? or will you be investing so much in one stock ?
Look at this way, if you have cash will you be investing it in your company so much ? or will you be investing so much in one stock ?
Should I consider Stock Options as part of my AAP?
The net value of the vested options only should be considered as invested in equities.
One other thing to realize is that the risk in such a case is much higher than the risk in just investing in a stock.
Investing in an individual stock can carry a risk which may be 2 to 3 times as investing in a diversified equity MF.
However let us take the following example:
Say yu have stock options - 1000 shares vested.
Grant price: $20
Current price: 30
Your net value is $10,000 in this.
Now if the stock declines by 20%.
Your net value becomes $4000 or your loss becomes 60%. This is because after a 20% decline in value of stock, the price of the $30 stock will become $24.
Now consider if you had your own $10,000 invested directly in this stock and then in that case, the 20% decline will still be 20%.
Be aware that because these are options, your risk is maginified. Be cognizant of the fact.
One other thing to realize is that the risk in such a case is much higher than the risk in just investing in a stock.
Investing in an individual stock can carry a risk which may be 2 to 3 times as investing in a diversified equity MF.
However let us take the following example:
Say yu have stock options - 1000 shares vested.
Grant price: $20
Current price: 30
Your net value is $10,000 in this.
Now if the stock declines by 20%.
Your net value becomes $4000 or your loss becomes 60%. This is because after a 20% decline in value of stock, the price of the $30 stock will become $24.
Now consider if you had your own $10,000 invested directly in this stock and then in that case, the 20% decline will still be 20%.
Be aware that because these are options, your risk is maginified. Be cognizant of the fact.
Should I consider Stock Options as part of my AAP?
Desi,
Your perceptive of risk is very true when the stock price goes down. Isn't the reverse is also true when the stock price goes up? Since the potential for gain is higher I am struggling to decide should I sell it when there is no need for me to do so?
Will using a DCA approach for selling these options minimize my price movement risk?
Your perceptive of risk is very true when the stock price goes down. Isn't the reverse is also true when the stock price goes up? Since the potential for gain is higher I am struggling to decide should I sell it when there is no need for me to do so?
Will using a DCA approach for selling these options minimize my price movement risk?
Should I consider Stock Options as part of my AAP?
In options and especially in call options which is what you have, the potential for gain is very high and risk for loss is small (just the premium).
In your case, the options are company stock options, so there is no premium that you paid, but none the less they hold that value.
As to loss here - Here we are talking about not the premium paid but rather that options have already gained in value and there is a risk of loss of that. While this loss will not be money pulled out of your pocket, but this will be money in your pocket if you exercise and it is this loss that can be substantial when compared to the say currently appreciated value.
Exercising company stock options is always a tough call if there is substantial appreciation. Main reason is that there is a time frame with call options and if you exercise much earlier, you lose the time value of the option.
Normally one expects that stocks over time will go up and therefore company stock options should be kept till very close to expiration. Exercising much earlier causes one to lose the time premium.
However if there is a substantial amount of gain in the options much before expiration, it complicates situation. One one hand, you have the potential for loss of that paper gain (which is alleviated by exercise) and on other hand if you exercise, you lose the intangible time premium ( I call it intangible because this stock option is not tradeable in the market). Typically in tradeable stock options also, the time premium shrinks as the option gets in the money (i.e. stock price above strike price).
I hope I have not confused you, but as you can see risk tolerance and willingness to take that risk plays a part.
In your case, the options are company stock options, so there is no premium that you paid, but none the less they hold that value.
As to loss here - Here we are talking about not the premium paid but rather that options have already gained in value and there is a risk of loss of that. While this loss will not be money pulled out of your pocket, but this will be money in your pocket if you exercise and it is this loss that can be substantial when compared to the say currently appreciated value.
Exercising company stock options is always a tough call if there is substantial appreciation. Main reason is that there is a time frame with call options and if you exercise much earlier, you lose the time value of the option.
Normally one expects that stocks over time will go up and therefore company stock options should be kept till very close to expiration. Exercising much earlier causes one to lose the time premium.
However if there is a substantial amount of gain in the options much before expiration, it complicates situation. One one hand, you have the potential for loss of that paper gain (which is alleviated by exercise) and on other hand if you exercise, you lose the intangible time premium ( I call it intangible because this stock option is not tradeable in the market). Typically in tradeable stock options also, the time premium shrinks as the option gets in the money (i.e. stock price above strike price).
I hope I have not confused you, but as you can see risk tolerance and willingness to take that risk plays a part.
Should I consider Stock Options as part of my AAP?
Desi,
Beautiful explanation.
I never looked stock option as a call option which in truth that is what it is.
Since there is no financial need for me to sell these stock options, I will hold on to them until close to expiration. Though there are no guarantees of higher gains, I will simply try to maximize my Time value of my options.
On the other hand I will sell all my company stocks that I bought through ESPP and diversify it to index funds.
Many Thanks for taking time to explain this.
Beautiful explanation.
I never looked stock option as a call option which in truth that is what it is.
Since there is no financial need for me to sell these stock options, I will hold on to them until close to expiration. Though there are no guarantees of higher gains, I will simply try to maximize my Time value of my options.
On the other hand I will sell all my company stocks that I bought through ESPP and diversify it to index funds.
Many Thanks for taking time to explain this.