The Answers to these Questions illustrate that selling calls should be promote to holders of employee stock options.
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Questions and answers for Fiduciaries and Options Plan designers
1. Questions & Answers
for holders of
Employee
Stock Options
2. Questions and Answers for Employee Stock Options Holders
Question #1
Which strategy of managing vested in-the-money employee stock options,
eliminates the alignment between the grantee and the shareholders the earliest,
thereby defeating the purpose of the grants?
a) Hold to near expiration (without early exercise or hedging) and exercise if in-the-
money.
b) Make early exercises, sell stock and "diversify".
c) Reduce risk, generate income by selling exchange traded calls and sometimes
buy puts.
Answer #1
b) All alignment is eliminated when the stock is sold. Full alignment continues
in a) and partial alignment continues in c)
3. .
Question #2
Which strategy forfeits part of the employee stock options value (called "time
value") back to the company and causes an early payment of income tax?
a) Hold to near expiration (without early exercise or hedging) and exercise if in-
the-money.
b) Make early exercises, sell stock and "diversify".
c) Reduce risk, generate income by selling exchange traded calls and
sometimes buy puts.
Answer #2
b) The penalties are quite high with b).
There are no penalties with a) and c)
4. Question #3
.
Which strategy reduces risk the least?
a) Hold to near expiration (without early exercise or hedging) and exercise if in-
the-money.
b) Make early exercises, sell stock and "diversify".
c) Reduce risk, generate income by selling exchange traded calls and sometimes
buy puts.
Answer #3
a) does not reduce the risk of a concentrated position at all.
b) eliminates the concentrated position but exposes the employee to market risk
on the residual amounts after forfeiture of "time value" and paying an early tax.
c) Reduces risk of the concentrated position and incurs no exposure to market
risk
5. Question #4
.
Which strategy has no merit most of the time in the life of the employee stock
options?
a) Hold to near expiration (without early exercise or hedging) and exercise if in-
the-money.
b) Make early exercises, sell stock and "diversify".
c) Reduce risk, generate income by selling exchange traded calls and
sometimes buy puts.
Answer #4
b) the probability of the stock increasing to levels when even the promoters of
b) advise using it, is very small (i.e. about one chance in 10 after vesting),
whereas
c) allows risk reduction immediately after vesting in many situations
6. Question #5
.
Which strategy has the best expected after tax returns to
the employee/ grantee with the least risk?
a) Hold to near expiration (without early exercise or hedging) and exercise
if in-the-money.
b) Make early exercises, sell stock and "diversify".
c) Reduce risk, generate income by selling exchange traded calls and sometimes
buy puts.
Answer #5
a) has the greatest potential with the greatest risk
c) has less potential than a) but less risk
b) has the least potential and more risk than c)
7. .
Question # 6
What Strategy generates early cash flows to the company through the company
issuing new shares to the employee and taking a tax deduction as the
employee exercises and pays cash to the company and to the government.
a) Hold to near expiration (without early exercise or hedging) and exercise if in-
the-money.
b) Make early exercises, sell stock and "diversify".
c) Reduce risk, generate income by selling exchange traded calls and
sometimes buy puts.
Answer #6
b) generates earliest cash flow to the company, which is one of the main
reasons why it is promoted by the industry
8. .
Question #7
What strategy benefits the Wealth Managers by getting most Assets Under
Management?
a) Hold to near expiration (without early exercise or hedging) and exercise if in-
the-money.
b) Make early exercises, sell stock and "diversify".
c) Reduce risk, generate income by selling exchange traded calls and
sometimes buy puts.
Answer #7
b) The Wealth Managers use the net after tax proceeds from early exercise and
selling the stock to buy mutual funds, which generally under-perform the market
indexes.
9. .
Question # 8
Which strategy is most prone to violations of SEC Rule 10 b-5
a) Hold to near expiration (without early exercise or hedging) and exercise if in-
the-money.
b) Make early exercises, sell stock and "diversify".
c) Reduce risk, generate income by selling exchange traded calls and
sometimes buy puts.
Answer # 8
c) There has never been a 10 b-5 prosecution for selling calls or buying puts
to reduce risk and there has never has been a prosecution for holding to near
expiration, exercising and selling. All prosecutions have been from early
exercises, sell and diversify. Many violations for early exercises and sell are
never prosecuted civilly or criminally.
10. .
Question #9
Which Strategy is rarely prohibited by the company in the stock plan and grant
documents, but is highly discouraged by the "Insider Trading Policies".
a) Hold to near expiration (without early exercise or hedging) and exercise if in-
the-money.
b) Make early exercises, sell stock and "diversify".
c) Reduce risk, generate income by selling exchange traded calls and
sometimes buy puts.
Answer #9
c) There is an attempt to stop the most beneficial strategy to the grantees by
the company fraudulently using the Insider Trading Policy to try to stop selling
calls and or buying puts even though the the Insider Trading Policy allows b)
and there has never been a civil or criminal complaint for c).
11. .
Question #10
Which strategy is most prone to implicate the Wealth Managers in violations
of fiduciary duties to their clients and violations of 10 b-5.
a) Hold to near expiration without early exercise or hedging and exercise if in-
the-money.
b) Make early exercises, sell stock and "diversify".
c) Reduce risk, generate income by selling exchange traded calls and
sometimes buy puts.
Answer #10
b) The companies and the wealth managers ally together to promote the
strategy that best helps themselves but most diminish the value to the
grantees. And the employees are intimidated from pressing the issues for fear
of losing their jobs.
12. .
All of the questions and answers are relevant for understanding and managing
your granted employee stock options.
John Olagues
504-875-4825
olagues@gmail.com
http://www.wiley.com/WileyCDA/WileyTitle/productCd-0470471921.html