Non-qualified Stock Options; when to sell?

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TX_Drew
Posts: 33
Joined: Wed May 16, 2018 11:37 am

Non-qualified Stock Options; when to sell?

Post by TX_Drew » Wed May 16, 2018 12:30 pm

Hi BHs,

Long time reader, first time poster. Big fan of the site, VTI, and all the shared opinions/perspectives. Thanks!

I'm curious people's strategies for selling non-qualified stock options. I'm 40, been with a very profitable and growing large cap co for 17 years. NQ options vest 25% annually and expire after 10 years. Many colleagues "take the money and run" relatively quickly once vested after the stock appreciates some (I don't think there is an equation they're using). And it seems new NQ option grants are more stingy than they've been in the past.

For most of my career I've tried to wait until final 1-2 years of the 10 year window before exercising; I don't set price targets, rather calendar targets. There isn't any complex logic behind this, other than over time stocks are supposed to go up, so let it ride as long as possible (also deferring taxes and spending it). I'm also a compulsive quant, always analyzing the macro/micro and would HOPE I would jump if I saw doom coming...but who knows.

Holding the NQ options has worked well to-date, especially last 3 years, and I'm now wondering if maybe I should exercise more sooner. I'll emphasize current Co is being more stingy on # of these I get, and my future career opportunities with this Co don't appear to change this soon. So shares exercised are replaced at a slower rate than years past. Vested balance is about $500k, with the bulk of the value not expiring for 3-6 years. Vested balance makes up about 20% of my NW (pre-tax); retirement is about 1M in passive indexes, house paid off, 529s done, and the rest individual stocks which I enjoy for the gamble of it.

So bottom-line: I'm torn between selling more aggressively (and limiting NQ option exposure moving forward, boring), vs. staying the course which has proved a good strategy to-date (blind luck or genius?). What say you BHs? Thanks in advance.

bloom2708
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Location: Fargo, ND

Re: Non-qualified Stock Options; when to sell?

Post by bloom2708 » Thu May 17, 2018 12:28 pm

My goal was diversification. When you exercise options, you always run the risk of "losing out" on future stock appreciation. On the flip side, you could lose out if the stock price drops to or below the option price.

The key for us was to not look back. Your salary, benefits and career are already tied to the company. If a bigger company, US index funds likely have a stake. Perhaps a large stake.

Our goal was to exercise, sell and diversify into our 3 fund style portfolio. Total US, Total International and the appropriate bond fund (taxable or tax-sheltered).

How you implements a diversification strategy is up to you. Fear of missing out should be balanced with fear or something unexpected happening.

Maybe a 3 year plan. 1/3, 1/3, 1/3. You may have specific holding requirements and will have to take that into place for tax purposes.

My company changed to stock awards, so our NQ stock option days are over. I do miss some of the fear of missing out/fear of bad things happening.

Others with current NQ options can hopefully share their plans. Has to be some out here in Bogleland.
Where to spend your time: | 1. You completely control <--spend your time here! | 2. You partially control <--spend your time here! | 3. You have no control <--spend no time here!

MrBeaver
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Re: Non-qualified Stock Options; when to sell?

Post by MrBeaver » Fri May 18, 2018 10:08 am

In general, NQSO have time value which you cannot capture by selling the options like you could if it were a tradable option. This means that as long as the underlying stock price doesn't go down in value between now and when you sell it, you are generally better holding them and you get a leverage bonus.

grok87 put together a rule of thumb which might provide useful, but fundamentally this is a risk/reward decision:
viewtopic.php?f=1&t=50963

Personally, I have a few that will be expiring in 6-8 years, and I plan on starting to unload them this year for the next three years. My reasons are more life-desire motivated than optimal-return motivated however. First they are already in the money by 2x, so the ratio of their theoretical time value to their intrinsic value is small. If I stay at my current employer for more than 3 years, my tax bracket will likely increase, leading to sacrificing an additional 10-15% of the NQSO value to taxes if I hold them to near expiration. But for a shorter commute and family desires, I will likely be looking for alternate employment closer to where we live 2.5 years from now. If I sell it all during that year when I leave my employer, I may end up paying an extra 15% of taxes above what I would pay by slowly selling them over the next 3 years.

Ron Scott
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Re: Non-qualified Stock Options; when to sell?

Post by Ron Scott » Fri May 18, 2018 12:09 pm

The correct answer, for whomever is asked, is to diversify.

But you know your company and we do not.

I exercised and held options, paying the tax out of cash for many many years and even took out loans to do so. In the end It paid off like the lottery. But that's me.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. Preparing for financial challenges is more fruitful than trying to predict them.

bradpevans
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Re: Non-qualified Stock Options; when to sell?

Post by bradpevans » Fri May 18, 2018 1:14 pm

Ron Scott wrote:
Fri May 18, 2018 12:09 pm
The correct answer, for whomever is asked, is to diversify.

But you know your company and we do not.

I exercised and held options, paying the tax out of cash for many many years and even took out loans to do so. In the end It paid off like the lottery. But that's me.
Did the "exercise and hold" do better than "exercise and sell PLUS buy the same amount of stock in cash"?
In other words, did it pay off more because you owned more shares (that you paid with the loan money)?

Or is there some intrinsic reason that "exercise and hold" is better than "exercise and sell"?

dcabler
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Re: Non-qualified Stock Options; when to sell?

Post by dcabler » Fri May 18, 2018 1:30 pm

Howdy also from TX. I've been in the semiconductor industry for 30+ years. If my options were above water, I've always sold them as soon as they were vested. As other have said, the idea is to diversify. I have enough risk with any company I've worked for just being an employee and I've never seen any reason to take anymore risk than that. I do likewise with ESPP and RSU's, which are much more common than options are these days.

Might be a different story if I were working at a startup or at a company looking to be acquired as that would have been a prime motivator for working there in the first place. And I did work at some startups in the past, but like so many, that never did work out.

MrBeaver
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Re: Non-qualified Stock Options; when to sell?

Post by MrBeaver » Fri May 18, 2018 3:20 pm

bradpevans wrote:
Fri May 18, 2018 1:14 pm
Did the "exercise and hold" do better than "exercise and sell PLUS buy the same amount of stock in cash"?
In other words, did it pay off more because you owned more shares (that you paid with the loan money)?

Or is there some intrinsic reason that "exercise and hold" is better than "exercise and sell"?
As far as I know, 'exercise and hold' is only beneficial over 'exercise and sell' for ISOs, as the tax treatment of the discount can become long-term capital gains instead of ordinary income. For NQSOs, I don't think there is any financial advantage between 'exercise at time T, sell at time Q' vs 'hold past time T and exercise and sell at time Q'. In fact, doing the former requires putting up cash that you don't have to in the latter case.

To the question of when to exercise and sell for NQSO, that's answered by your risk tolerance, diversification, etc. Theoretically holding toward the end of the period helps you capture more of the time value of the option, but that assumes the value of the stock will not be lower at the end of the option period.

Wagnerjb
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Location: Houston, Texas

Re: Non-qualified Stock Options; when to sell?

Post by Wagnerjb » Fri May 18, 2018 4:24 pm

As you know, financial theory says to wait until the last day, but that ignores the issue of personal diversification. I generally waited until the last year or two, but I set a target % of my retirement funds that I wanted to keep under. Mine was 20% as I recall, but if your retirement assets are $1M, then you are closer to 33% today.

I would be inclined to exercise the oldest options until you achieve a diversification level with which you are comfortable. Then continue to hold the rest.

I don't see a need to suddenly change your exercise strategy such that you pull the trigger much earlier. But you need a diversification strategy to drive your exercise decision.

Best wishes.
Andy

Ron Scott
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Joined: Tue Apr 05, 2016 5:38 am

Re: Non-qualified Stock Options; when to sell?

Post by Ron Scott » Thu May 24, 2018 8:39 am

bradpevans wrote:
Fri May 18, 2018 1:14 pm
Ron Scott wrote:
Fri May 18, 2018 12:09 pm
The correct answer, for whomever is asked, is to diversify.

But you know your company and we do not.

I exercised and held options, paying the tax out of cash for many many years and even took out loans to do so. In the end It paid off like the lottery. But that's me.
Did the "exercise and hold" do better than "exercise and sell PLUS buy the same amount of stock in cash"?
In other words, did it pay off more because you owned more shares (that you paid with the loan money)?
In my case, holding the shares paid about 2X what the market would have.
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. Preparing for financial challenges is more fruitful than trying to predict them.

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