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Bill Roper's Journal
Rolling the Dice 
26th-Mar-2009 03:04 pm
I have a small cache of stock options that I got when Company B acquired Company A. When Company C acquired Company B, they got converted into Company C options.

The clock is now running out on those options. With perfect knowledge, I would have decided to cash them in before the market crash. Having failed my precog roll, I didn't manage that. The good news is that the options had a long enough fuse to get past the really ugly bottom -- $13.85 -- that the stock hit on March 9th.

Today, Company C shares closed at $18.68.

I already feel lucky. The question is how lucky I feel between now and April 16th when the options expire...

ObDisclaimer: Yes, I am a Company C employee. No, I have no idea what the share price is going to do, nor do I speak for the corporation in any way, shape, or form.
Comments 
26th-Mar-2009 08:25 pm (UTC)
(chews nails) Gosh, I don't know.

I don't envy you your decision, but I wish you the best of luck!
26th-Mar-2009 08:46 pm (UTC)
Having never executed stock options, I don't know how easy or difficult it is, but if it's not too complicated a process I personally would execute an equal portion of them each day between now and the expiration date so at least some of them will be executed on the "best" date. This seems like the least likely to way to make the biggest profit, but also the least likely way to make the smallest profit :-)


26th-Mar-2009 08:51 pm (UTC) - My previous company
One of the developers in the IT dept of my previous company they would check the company stock price on the day of a painfull upgrade/rollout. It turned out that that a bad day for IT was typically a good day for the stock.

Disclaimer: Any financial advice implied by my statement is purely in the imagination of the reader. Anyone making financial decisions based on a statement of mine deserves what they get.
26th-Mar-2009 08:59 pm (UTC)
Gee, Bill, do you think you can vague that up for us a little? :)
26th-Mar-2009 10:17 pm (UTC)
When I left my previous employer I had options that were originally for something like $120.00/share. They would have actually exercised for $40.00/share due to a stock split shortly after they were issued. By the time I left the company, the stock price had been as low as $3.00 or $5.00, and had stayed somewhere around $10.00 for a while.

Starting on my 1 year anniversary with the current employer, I'll have options that I don't think will be worth much more than stock price, but won't be far behind. We've not lost, or gained, much since I started working here.
26th-Mar-2009 10:51 pm (UTC)
I know nothing of ESO's, so I'll ask questions. Doesn't a stock option have a price? I.e. you have the option to buy 100 shares for $20.00/each. Second, is there any requirement that you hold on to the stock if you use the option? If the option is for $20, the current price is $25, and there's no requirement to hold, why not do a flip?

Really it seems like it's only a hard question if there's a hold requirement. If the option is for less than the current sale price, use them. Maybe put a sell trigger on the stock if you're concerned it'll go way low. If the option is for more than the current price, sit and revisit the question if the price goes up before the expiration.
27th-Mar-2009 03:58 am (UTC)
Yes, the stock option has a price and the options are in the money. I can flip the stock immediately if I want to -- and I will want to, since I don't want to come up with the cash to pay for the stock and the taxes on the profit.

The question in my mind is how close to the option expiration date I should exercise the options. Whenever I exercise, I lock in the gain. I'm just wondering if the stock is likely to go up further or not.

If I knew the answer to that, I could be making a lot of money in a lot of ways. :)
27th-Mar-2009 05:28 am (UTC)
one thought is to exercise the options, then immediately sell enough of the stock to cover the transaction cost.
I don't think you have to pay the taxes until you actually REALIZE the gain by selling the shares (consult your tax advisor)

so you have 1000 shares at 10 dollar option price, you exercise the option locking at 20 at a cost of $10K You sell 500 shares for 20 each, realizing a taxable gain of 5K for that year,, but then leaving you with 500 paid for shares of stock. You waith through the rest of the year, and if the stock takes a violent swing up or down, you can dump the remaining shares to either offset some of the previos gain, leaving you tax neutral, or taking advantage of an uptick.
If no significant change occurs, you pay your taxes on the 5k gain and still have 500 "free" shares with your exercise price as a tax basis.
27th-Mar-2009 06:23 am (UTC) - Company C stock options: I have the t-shirt
When I worked for Company C in the late 90s, we all thought that we should hold onto our stock options as long as possible because in the long run, Company C stock would continue to increase in value. The stock is now worth 40% of what it was worth in September 1, 2000. In the long run, we are all dead.

We also thought that because we hadn't put in any money up front, it wasn't real money so we didn't have to worry. Wrong again. When the stock goes down, you lose real money whether you hold an above-water option or the actual stock.

I exercised my options and sold my stock in October, 2000 not because I was smarter than everybody else but because I left Company C.

As I recall, when you exercise, your profit due to the difference between the current price and the option exercise price is taxed as ordinary income. So, ignoring a small transaction cost, exercising and holding is identical to exercising, selling, and re-buying. So you would buy and hold only if Company C stock is your favorite investment. Morningstar gives Company C 3 stars and says that its fair value is 21.00.

I've heard the argument that you should try to exercise at a low price more than a year before you plan to sell, so that as much of your gain as possible will be taxed at capital gain rates, but that requires precognition.

Company C announced quarterly earnings very recently, so there is unlikely to be major news that affects the stock prior to April 16. I therefore expect the price of Company C stock to follow the stock market as a whole. Has the market hit bottom? I dunno. A few reasons why this question is hard to answer are explained here.

Surprisingly, Company C is only slightly more risky than the market as a whole: beta = 1.08. If you do not want to incur this level of risk over the next few weeks, that would be one reason to exercise soon.

I recall that Company C has quiet periods during which options may not be exercised. I don't think that would affect you, but my memory on this point is uncertain.
27th-Mar-2009 06:45 am (UTC) - Re: quiet period
Not to worry. The quiet period begins two weeks before the close of the quarter, and ends once quarterly earnings have been announced.
27th-Mar-2009 05:56 pm (UTC)
Company C's leader, Mr. E, has been quiet lately.

Or maybe I'm not reading the right news...

If he gets into another acquisition fight, the stock will probably go down. Otherwise, I would expect a gradual upward drift as their markets recover.

(We've never had a recession that didn't end, so I expect upward motion at some point.)
31st-Mar-2009 04:16 pm (UTC)
Economic forecast by Nobel-prize-winning economist Paul Krugman:

So far, there’s nothing pointing to a fundamental turnaround this year, or next, or for that matter as far as the eye can see.
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