Your Financial Needs
If you are holding onto your stock options in hopes that the stock price will rise in the future, you need to consider your current cash needs versus the potential for future gains. If you need cash now and have valuable options, exercising them is an excellent choice. You may not see a rise in stock prices in the future, and you can use the cash you can get from exercising your options for other diversified investments, paying down your mortgage, or covering any other significant expenses.
Risk/Reward Balance
There is an element in your stock options called “time value”. When there are many years remaining until the expiration date, the time value represents the potential opportunity for additional gains or losses in the future. Time value can be connected to the concept of opportunity cost. If you exercise the option, what opportunities will you miss out on? You may invest the money elsewhere, but will the company’s stock yield better returns in the future? A down payment on a home may help save money on mortgage interest, but if you buy and hold the stock, you may generate enough returns to fully fund your retirement.
Tax Planning Opportunities
Tax planning involves anticipating expected income and deductions over the coming years. Exercising all your options in one year may push you into a higher tax bracket. There may be benefits to exercising some options now and waiting to exercise others. It might be tax-smart to exercise part of your options annually rather than waiting until expiration to exercise them all.
Market Conditions
You should consider the volatility of your company’s stock price and the volatility of the market conditions in general. The sun does not always shine on a company, no matter how well it manages cash and innovates. Recessions can be harsh on company operations and stock prices. If your company is experiencing significant and rapid growth in an industry, you may want to consider exercising your options and reinvesting in lower-risk investments, especially if you start to wonder if a bubble might burst. On the other hand, if the company has weathered past recessions, you may prefer to wait.
Amount of Options / Investor Maturity
If you come from a high net worth family that is financially sophisticated, you may seek more advanced strategies than a family with less financial capability. A good rule of thumb is to not do something if you don’t understand it. John Olajis, author of “Getting Started with Employee Stock Options”, discusses advanced strategies for exercising employee stock options. John is a former trader from the Chicago Board Options Exchange and the Pacific Exchange in San Francisco. According to Olajis, you can reduce risk and increase potential returns by employing advanced strategies involving selling options and buying options on the company’s stock. John insists that advanced options strategies are a more efficient way to reduce risk and capitalize on the remaining time value in your options compared to a straightforward exercise and sell strategy. Olajis elaborates on his thoughts in 5 golden rules for managing employee stock options. However, advanced strategies, such as trading derivatives on the company’s stock, should be implemented by employees who have stock options that may be valued at $500,000 or more and who are experienced investors.
When considering your stock options, do not strictly follow the thumb rule or investor advice or wait until the last possible moment. Look at all the factors in making a decision that aligns with your needs.
Source: https://www.thebalancemoney.com/when-to-exercise-stock-options-2388516
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