This presentation illustrates that there are no substantial constraints to hedging your ESOs. John Olagues www.truthinoptions.net olagues@gmail.com 504-875-4825 http://www.wiley.com/WileyCDA/WileyTitle/productCd-0470471921.html

1. John Olagues Truth In Options 504-305-4449 www.optionsforemployees.com/articles [email_address] John Olagues Truth In Options www.optionsforemployees.com .

2. Alleged Constraints on Hedging ESOs Persons who discourage hedging Employee Stock Options with exchange traded calls and puts probably do not understand the subject well or have a financial interest in discouraging hedging. The employer and their investment bankers discourage hedging. Most wealth managers do the same. They dream up all kinds of ideas that allegedly constrain the hedges, when in fact there are very few significant constraints. This presentation addresses those alleged constraints.

3. They Claim....The companies prohibit hedging. Truth.... Most companies do not prohibit hedging in the Stock or Option Plans, although a few do. Those that do, diminish the value of the options to the grantees as they are forced to make premature exercises and sell the stock in order to reduce the risks of holding speculative instruments. Many companies communicate unofficially that hedging equity compensation is prohibited although it is permitted.

4. The claim is made that hedging by selling exchange traded calls and buying puts defeats the purpose of the equity grants by reducing the alignment of interests . Truth.... It is true that if a grantee sells calls or buys puts versus his employee stock options, he will reduce the long position. But when he does so, his long position is reduced less than when he exercises and sells stock and diversifies. But companies never discourage grantees from making premature exercises, with the attendant forfeiture of time premium back to the company and paying an early tax by the employee .

5. They Claim...That uncertain IRS rules make it risky to hedge with calls and puts against ESOs. They claim that IRS Section 1092, the Straddle Rule, will delay the reporting of losses sustained in hedges with puts and calls. Truth... IRS Section 1092 seems not apply to ESOs as one side of offsetting positions. This is so since the ESOs, never have an "unrecognized gain", according to the definition in Section 1092. There are other reasons why Section 1092 has no effect even if it did apply. If you think that 1092 applied then make the "identified straddle" designation and make any losses add to the basis. there are other reasons

6. They Claim.... that IRS Section 1221, may or may not apply. Truth... is that it doesn't matter that much, whether Section 1221 applies or not. If Section 1221 applied, then the gains or losses on the puts and calls is ordinary income or loss. If Section 1221 did not apply, the gains or losses are capital gains or losses. In my view the gains or losses from selling at or out-of-the-money calls are capital losses because section 1221 would not apply. ,

7. They Claim that the Wash Sale Rule and the Constructive Sale Rule act to constrain hedging. The Wash Sale Rule IRS Section 1091 does not constrain hedging nor does the Constructive Sale Rule Section 1259, in my view.

8. They Claim that SEC Rule 16 c-4 and Section 16 c of the Securities Act of 1934 restrain hedging by officers and executives... Answer... a private letter ruling issued by the SEC to Credit Suisse in March 2004 allows the taking a collar versus holding substantially in the money vested ESOs if the ESOs are changed to a synthetic long stock position by the sale of a put with a strike price similar to the ESOs. If both the put positions were canceled, the remainder would be long the ESO and short the out of the money calls, which will comply with Rule 16b-4.

9. They Claim.... that Margin Rules are prohibitive. Truth is that minimum margin requirements for selling "uncovered calls" versus ESOs equal 10% of the value of the stock when the stock is 10% or more below the exercise price of the calls. Some firms charge the minimum. Some do not. If you have no cash or assets for margin requirements, then hedging is not available to you.