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Lore and lure of employee stock options

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The Wall Street Journal ran a story today about a woman who works for Moody’s. Moody’s stock has stumbled with the securitized dMCO Two Year Stock Chartebt market, and so has the value of her employee stock options. Her financial advisor is quoted as saying, “Options, as part of a portfolio, are often the riskiest asset a client has.” True.

The question we have is: if she had a financial advisor who understands the risks of employee stock options, why didn’t he convince her to exercise them before they fell off a cliff?

Financial planning is more than just telling a client the “right thing to do.” With our clients, most of whom are very capable professionals, the lore and lure of stock options have to be be dismantled before we can get them in the framework to make good decisions about their holdings.

Options are economically similar to buying stock on margin, equivalent to buying a house with very little money down. The first thing we do with clients is translate their option holdings into a share equivalent for them (downpayment -> house price, exercise value-> share position). The market value of these shares is usually dwarfs their other investments.

After the shock of that revelation wears off, we talk about the likelihood of them getting fabulously wealthy from their holdings, just like their neighbor John did.

Everyone in Silicon Valley has a neighbor John. John worked for XYZ Corp. and didn’t exercise any of his options and his company’s stock went to a zillion dollars and now he has enough money to buy a decent house in the Bay area.

Then we show them how much money they would have if they had exercised all their options in ABC Inc., paid the taxes and bought  options on Apple XYZ Corp. stock.

Then we do an analysis of their actual company and start looking at how different scenarios impact their overall net worth.

Then after all that sinks in, we can start talking about strategies for exercising stock options.

Topics: Appreciated Stock, Financial Planning, Investments, Stock | No Comments »


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