I’ll take a stab at your question on stock options since I am in a similar situation. I have some fairly deep in the money options that don’t expire until 2012. It’s a solid fortune 500 company, as likely as any to effectively weather a downturn, but also one heavily dependent on consumer spending and business investment.
Here are the considerations most at the fore of my mind (others can chime in with others):
1. Excercising the options triggers an immediate tax at ordinary rates.
2. The difference between the excercise price and zero is effectively free exposure to the market for you. In my case, I have exposure to about 150K in market capitalization. If the stock goes up 10%, I make 15K. If I sell, however, after taxes, I’m left with somewhere around 50K, which then gets taxed, leaving me with 40K or less. If I put the 40K in an account earning 5%/year or so, I make 2K/year. The stock only has to average 2% over the four years until expiry to make it a better deal to hold it. I’ve done a whole sensitivity analysis on this, and if the stock averages a 2-3% gain over 4-5 years, in my situation, I’m better off holding. If somehow that gain goes to 10%/year, I’ve made an extra 60K or so.
3. You can, theoretically protect that downside by buying puts on the stock (there could be tax implications here-not sure-and given your experience, I wouldn’t dabble here without professional help)
4. Unless the options are deep in the money, you should probably hold them. Your downside is limited to the amount they are currently in the money, but your upside is theoretically limitless.
There are a number of other considerations, but those are the biggies in my mind.
What am I doing? I’m 60% sure that the market will take a dive, but I’m not 100%. If the stock performs well below average, I am still better off holding. I’ve also considered how I’d feel if I lost my entire 50K, and for now, the potential upside is worth a roll of the dice (I have conservatized my portfolio in other areas so that my overall exposure is reasonable).
If your options expire in the next 2 years or so and are deep in the money, I’d be quick to excercise (barring any positive insider knowledge of how the company will do). If they last longer than that, and if you could live with yourself if they became worthless, you might consider rolling the dice.
