Strategies for protecting stock options/stock plan granted shares

[stansd]

I’ve thought about this quite a bit on my own account. The best hedge against owning an option is to, well, sell it. You can’t do that directly through your employer, but you can write call options on the market (with a strike and maturity as close as possible to the ones you own from the company). If the company does well, you owe on your written calls and make money on the company calls. If it does poorly, you pocket the premium on the written calls, which hedges your downside. you’d have to see an accountant because there are potential tax consequences if the government considers it a wash sale.

Also beware of getting fired because you could lose the offset to your position in the market.

Other potential options as mentioned are to short the stock-not recommended, or to buy high strike puts on the stock, which is an expensive strategy.

Would write more, but have to get my daughter to bed.

Stan

[Coronita]

[quote=stansd]I’ve thought about this quite a bit on my own account. The best hedge against owning an option is to, well, sell it. You can’t do that directly through your employer, but you can write call options on the market (with a strike and maturity as close as possible to the ones you own from the company). If the company does well, you owe on your written calls and make money on the company calls. If it does poorly, you pocket the premium on the written calls, which hedges your downside. you’d have to see an accountant because there are potential tax consequences if the government considers it a wash sale.

Also beware of getting fired because you could lose the offset to your position in the market.

Other potential options as mentioned are to short the stock-not recommended, or to buy high strike puts on the stock, which is an expensive strategy.

Would write more, but have to get my daughter to bed.

Stan[/quote]

Stan, have you actually done this with covered calls on existing shares or did you write naked calls? If so how did it work out for you? I know folks that employed covered calls on shares already existing like ESPP shares and I did some of this too for things I wanted to hold for a longer term..with mixed results…But I have yet to find someone that wrote naked call options against an unvested stock option or restricted stock grant, for the reason that if you do get fired/laidoff/etc AND the stock goes up, you’re on the hook for coming up with the missing shares if your written option does get called.

Please write more. Just curious what others are thinking….

[Coronita]

[quote=stansd]I’ve thought about this quite a bit on my own account. The best hedge against owning an option is to, well, sell it. You can’t do that directly through your employer, but you can write call options on the market (with a strike and maturity as close as possible to the ones you own from the company). If the company does well, you owe on your written calls and make money on the company calls. If it does poorly, you pocket the premium on the written calls, which hedges your downside. you’d have to see an accountant because there are potential tax consequences if the government considers it a wash sale.

Also beware of getting fired because you could lose the offset to your position in the market.

Other potential options as mentioned are to short the stock-not recommended, or to buy high strike puts on the stock, which is an expensive strategy.

Would write more, but have to get my daughter to bed.

Stan[/quote]

Stan, have you actually done this with covered calls on existing shares or did you write naked calls? If so how did it work out for you? I know folks that employed covered calls on shares already existing like ESPP shares and I did some of this too for things I wanted to hold for a longer term..with mixed results…But I have yet to find someone that wrote naked call options against an unvested stock option or restricted stock grant, for the reason that if you do get fired/laidoff/etc AND the stock goes up, you’re on the hook for coming up with the missing shares if your written option does get called.

Please write more. Just curious what others are thinking….

[Coronita]

[quote=stansd]I’ve thought about this quite a bit on my own account. The best hedge against owning an option is to, well, sell it. You can’t do that directly through your employer, but you can write call options on the market (with a strike and maturity as close as possible to the ones you own from the company). If the company does well, you owe on your written calls and make money on the company calls. If it does poorly, you pocket the premium on the written calls, which hedges your downside. you’d have to see an accountant because there are potential tax consequences if the government considers it a wash sale.

Also beware of getting fired because you could lose the offset to your position in the market.

Other potential options as mentioned are to short the stock-not recommended, or to buy high strike puts on the stock, which is an expensive strategy.

Would write more, but have to get my daughter to bed.

Stan[/quote]

Stan, have you actually done this with covered calls on existing shares or did you write naked calls? If so how did it work out for you? I know folks that employed covered calls on shares already existing like ESPP shares and I did some of this too for things I wanted to hold for a longer term..with mixed results…But I have yet to find someone that wrote naked call options against an unvested stock option or restricted stock grant, for the reason that if you do get fired/laidoff/etc AND the stock goes up, you’re on the hook for coming up with the missing shares if your written option does get called.

Please write more. Just curious what others are thinking….

[Coronita]

[quote=stansd]I’ve thought about this quite a bit on my own account. The best hedge against owning an option is to, well, sell it. You can’t do that directly through your employer, but you can write call options on the market (with a strike and maturity as close as possible to the ones you own from the company). If the company does well, you owe on your written calls and make money on the company calls. If it does poorly, you pocket the premium on the written calls, which hedges your downside. you’d have to see an accountant because there are potential tax consequences if the government considers it a wash sale.

Also beware of getting fired because you could lose the offset to your position in the market.

Other potential options as mentioned are to short the stock-not recommended, or to buy high strike puts on the stock, which is an expensive strategy.

Would write more, but have to get my daughter to bed.

Stan[/quote]

Stan, have you actually done this with covered calls on existing shares or did you write naked calls? If so how did it work out for you? I know folks that employed covered calls on shares already existing like ESPP shares and I did some of this too for things I wanted to hold for a longer term..with mixed results…But I have yet to find someone that wrote naked call options against an unvested stock option or restricted stock grant, for the reason that if you do get fired/laidoff/etc AND the stock goes up, you’re on the hook for coming up with the missing shares if your written option does get called.

Please write more. Just curious what others are thinking….

[Coronita]

[quote=stansd]I’ve thought about this quite a bit on my own account. The best hedge against owning an option is to, well, sell it. You can’t do that directly through your employer, but you can write call options on the market (with a strike and maturity as close as possible to the ones you own from the company). If the company does well, you owe on your written calls and make money on the company calls. If it does poorly, you pocket the premium on the written calls, which hedges your downside. you’d have to see an accountant because there are potential tax consequences if the government considers it a wash sale.

Also beware of getting fired because you could lose the offset to your position in the market.

Other potential options as mentioned are to short the stock-not recommended, or to buy high strike puts on the stock, which is an expensive strategy.

Would write more, but have to get my daughter to bed.

Stan[/quote]

Stan, have you actually done this with covered calls on existing shares or did you write naked calls? If so how did it work out for you? I know folks that employed covered calls on shares already existing like ESPP shares and I did some of this too for things I wanted to hold for a longer term..with mixed results…But I have yet to find someone that wrote naked call options against an unvested stock option or restricted stock grant, for the reason that if you do get fired/laidoff/etc AND the stock goes up, you’re on the hook for coming up with the missing shares if your written option does get called.

Please write more. Just curious what others are thinking….

[stansd]

I haven’t actually done this because I still believe my companiy’s stock will go up, so I don’t want to unload my calls. I’ve actually purchased additional calls on my company in the market, which, being a finance guy well versed in diversification is a dumb thing to do.

When the time is right, though, I will write naked calls (you actually aren’t naked when you have a perfect offset). I’m 100% vested, and have little fear of getting fired or laid off. This is actually a bigger issue than just hedging. If you excercise calls early, you give up option value, so I’d rather pocket that premium by selling naked calls in the market and running the other discussed risks than exercising early.

Put call parity says Stock + Put = Call + Present value of excercise price.

Another way to do this same thing (effectively sell the call), then, would be to Short the Stock & Sell puts at the same strike as the call. There’s a bit more to the mechanics, but I don’t have time to think it through right now. Technically, you’d invest the proceeds in a CD or the like, but usually, you don’t actually get the funds from the short if you aren’t a hedge fund (if someone has found a way to do this on a small scale, please let me know)

Good luck,

Stan

[stansd]

I haven’t actually done this because I still believe my companiy’s stock will go up, so I don’t want to unload my calls. I’ve actually purchased additional calls on my company in the market, which, being a finance guy well versed in diversification is a dumb thing to do.

When the time is right, though, I will write naked calls (you actually aren’t naked when you have a perfect offset). I’m 100% vested, and have little fear of getting fired or laid off. This is actually a bigger issue than just hedging. If you excercise calls early, you give up option value, so I’d rather pocket that premium by selling naked calls in the market and running the other discussed risks than exercising early.

Put call parity says Stock + Put = Call + Present value of excercise price.

Another way to do this same thing (effectively sell the call), then, would be to Short the Stock & Sell puts at the same strike as the call. There’s a bit more to the mechanics, but I don’t have time to think it through right now. Technically, you’d invest the proceeds in a CD or the like, but usually, you don’t actually get the funds from the short if you aren’t a hedge fund (if someone has found a way to do this on a small scale, please let me know)

Good luck,

Stan

[stansd]

I haven’t actually done this because I still believe my companiy’s stock will go up, so I don’t want to unload my calls. I’ve actually purchased additional calls on my company in the market, which, being a finance guy well versed in diversification is a dumb thing to do.

When the time is right, though, I will write naked calls (you actually aren’t naked when you have a perfect offset). I’m 100% vested, and have little fear of getting fired or laid off. This is actually a bigger issue than just hedging. If you excercise calls early, you give up option value, so I’d rather pocket that premium by selling naked calls in the market and running the other discussed risks than exercising early.

Put call parity says Stock + Put = Call + Present value of excercise price.

Another way to do this same thing (effectively sell the call), then, would be to Short the Stock & Sell puts at the same strike as the call. There’s a bit more to the mechanics, but I don’t have time to think it through right now. Technically, you’d invest the proceeds in a CD or the like, but usually, you don’t actually get the funds from the short if you aren’t a hedge fund (if someone has found a way to do this on a small scale, please let me know)

Good luck,

Stan

[stansd]

I haven’t actually done this because I still believe my companiy’s stock will go up, so I don’t want to unload my calls. I’ve actually purchased additional calls on my company in the market, which, being a finance guy well versed in diversification is a dumb thing to do.

When the time is right, though, I will write naked calls (you actually aren’t naked when you have a perfect offset). I’m 100% vested, and have little fear of getting fired or laid off. This is actually a bigger issue than just hedging. If you excercise calls early, you give up option value, so I’d rather pocket that premium by selling naked calls in the market and running the other discussed risks than exercising early.

Put call parity says Stock + Put = Call + Present value of excercise price.

Another way to do this same thing (effectively sell the call), then, would be to Short the Stock & Sell puts at the same strike as the call. There’s a bit more to the mechanics, but I don’t have time to think it through right now. Technically, you’d invest the proceeds in a CD or the like, but usually, you don’t actually get the funds from the short if you aren’t a hedge fund (if someone has found a way to do this on a small scale, please let me know)

Good luck,

Stan

[stansd]

I haven’t actually done this because I still believe my companiy’s stock will go up, so I don’t want to unload my calls. I’ve actually purchased additional calls on my company in the market, which, being a finance guy well versed in diversification is a dumb thing to do.

When the time is right, though, I will write naked calls (you actually aren’t naked when you have a perfect offset). I’m 100% vested, and have little fear of getting fired or laid off. This is actually a bigger issue than just hedging. If you excercise calls early, you give up option value, so I’d rather pocket that premium by selling naked calls in the market and running the other discussed risks than exercising early.

Put call parity says Stock + Put = Call + Present value of excercise price.

Another way to do this same thing (effectively sell the call), then, would be to Short the Stock & Sell puts at the same strike as the call. There’s a bit more to the mechanics, but I don’t have time to think it through right now. Technically, you’d invest the proceeds in a CD or the like, but usually, you don’t actually get the funds from the short if you aren’t a hedge fund (if someone has found a way to do this on a small scale, please let me know)

Good luck,

Stan

[equalizer]

[quote=flu]
Thanks equalizer. I’ll read up on this…
Trying to hedge against restricted stock grants were part of a comp package and perf bonus that I chosen lieu of additional cash comps (shares, not options). Just looking to mitigate losses on it (in this economy).

Come on, no QC’s or Illumina folks????[/quote]
The site I linked has a lot of info to snare the high brow SV big honchos. There seems to be little info on hedging unvested options, so hope that Stansd has the lowdown.

Here’s an interesting article:

“Buying Puts to Hedge Employee Stock Options or Long Stock has unique Tax Advantages”

http://www.optionsforemployees.com/articles/article.php?id=128

[equalizer]

[quote=flu]
Thanks equalizer. I’ll read up on this…
Trying to hedge against restricted stock grants were part of a comp package and perf bonus that I chosen lieu of additional cash comps (shares, not options). Just looking to mitigate losses on it (in this economy).

Come on, no QC’s or Illumina folks????[/quote]
The site I linked has a lot of info to snare the high brow SV big honchos. There seems to be little info on hedging unvested options, so hope that Stansd has the lowdown.

Here’s an interesting article:

“Buying Puts to Hedge Employee Stock Options or Long Stock has unique Tax Advantages”

http://www.optionsforemployees.com/articles/article.php?id=128

[equalizer]

[quote=flu]
Thanks equalizer. I’ll read up on this…
Trying to hedge against restricted stock grants were part of a comp package and perf bonus that I chosen lieu of additional cash comps (shares, not options). Just looking to mitigate losses on it (in this economy).

Come on, no QC’s or Illumina folks????[/quote]
The site I linked has a lot of info to snare the high brow SV big honchos. There seems to be little info on hedging unvested options, so hope that Stansd has the lowdown.

Here’s an interesting article:

“Buying Puts to Hedge Employee Stock Options or Long Stock has unique Tax Advantages”

http://www.optionsforemployees.com/articles/article.php?id=128

[equalizer]

[quote=flu]
Thanks equalizer. I’ll read up on this…
Trying to hedge against restricted stock grants were part of a comp package and perf bonus that I chosen lieu of additional cash comps (shares, not options). Just looking to mitigate losses on it (in this economy).

Come on, no QC’s or Illumina folks????[/quote]
The site I linked has a lot of info to snare the high brow SV big honchos. There seems to be little info on hedging unvested options, so hope that Stansd has the lowdown.

Here’s an interesting article:

“Buying Puts to Hedge Employee Stock Options or Long Stock has unique Tax Advantages”

http://www.optionsforemployees.com/articles/article.php?id=128

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