Hedging RSU's

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Chan_va
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Hedging RSU's

Post by Chan_va » Wed Jun 20, 2018 4:42 pm

Let's assume that you work for a high flying FAANG type company where a substantial portion of your compensation is tied to RSU's (Restricted Stock Units). Assume that the RSU's will vest late in the year, and you want to lock in the current price now to hedge against a big drop between now and the end of the year.

What's the best way to go about doing this?

marcopolo
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Re: Hedging RSU's

Post by marcopolo » Wed Jun 20, 2018 4:57 pm

Chan_va wrote:
Wed Jun 20, 2018 4:42 pm
Let's assume that you work for a high flying FAANG type company where a substantial portion of your compensation is tied to RSU's (Restricted Stock Units). Assume that the RSU's will vest late in the year, and you want to lock in the current price now to hedge against a big drop between now and the end of the year.

What's the best way to go about doing this?
I am assuming this is a publicly traded company.
If you just want to lock in your current value (maybe a little more), you could buy some puts.

Edited: To say buy some puts. (I got puts and calls mixed up in previous post). Sorry for the confusion.
Last edited by marcopolo on Wed Jun 20, 2018 5:11 pm, edited 1 time in total.
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Tanelorn
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Re: Hedging RSU's

Post by Tanelorn » Wed Jun 20, 2018 5:08 pm

Short the number of shares as your RSUs, if your company allows. Writing calls, suggested above, does nothing to prevent large downside losses. If you don't want to or can't short the stock, you could short QQQ as a proxy. You could buy at or near the money puts to lock in the current price, but that will be much more expensive.

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Stinky
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Re: Hedging RSU's

Post by Stinky » Wed Jun 20, 2018 5:10 pm

marcopolo wrote:
Wed Jun 20, 2018 4:57 pm
Chan_va wrote:
Wed Jun 20, 2018 4:42 pm
Let's assume that you work for a high flying FAANG type company where a substantial portion of your compensation is tied to RSU's (Restricted Stock Units). Assume that the RSU's will vest late in the year, and you want to lock in the current price now to hedge against a big drop between now and the end of the year.

What's the best way to go about doing this?
I am assuming this is a publicly traded company.
If you just want to lock in your current value (maybe a little more), you could sell some calls. Not sure if they would be considered covered calls since you have not vested yet, but they are not completely naked either.
I agree that selling calls would work for hedging.

But before I do that, I would check with the employer. At one time, I also had RSUs from my employer, but couldn't "hedge" them because my employer prohibited trading in any kind of options or derivatives in my company's stock. I don't know how widespread this kind of prohibition is, but I would definitely check with employer before acting.
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Chan_va
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Re: Hedging RSU's

Post by Chan_va » Wed Jun 20, 2018 5:21 pm

Thanks folks- will check on whether the company allows hedges. Re: selling calls, from what I know - that doesn't protect you from large downside risk, correct?

Lets say the stock is trading at $100 today, and you wanted to protect against the stock dropping below $70. Can you walk me through how selling a call would work in this case?

Tanelorn
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Re: Hedging RSU's

Post by Tanelorn » Wed Jun 20, 2018 6:53 pm

Chan_va wrote:
Wed Jun 20, 2018 5:21 pm
Thanks folks- will check on whether the company allows hedges. Re: selling calls, from what I know - that doesn't protect you from large downside risk, correct?
Correct, it doesn't. With a sold call, you get paid a modest premium for giving up the upside over the strike price (assuming the stock exceeds that). If you get a 5% premium and the stock goes bust, now you only lost 95%...
Lets say the stock is trading at $100 today, and you wanted to protect against the stock dropping below $70. Can you walk me through how selling a call would work in this case?
It doesn't. If that's the protect you want, buy a $70 strike put for the time your RSUs vest.

cashheavy18
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Re: Hedging RSU's

Post by cashheavy18 » Wed Jun 20, 2018 7:17 pm

As you are checking with HR, a lot of employers have windows of time where you are blocked from any trading, period. Be on the watch for that as well.

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GoldStar
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Re: Hedging RSU's

Post by GoldStar » Wed Jun 20, 2018 7:22 pm

Be careful - don't know how large your hold is and how much you are planning to hedge but if you have access to significant insider info and are hedging significant value you are opening yourself up to potential investigation if things do go sideways (there is a reason why many companies have policies against doing this...)

Personally I would never hedge my RSUs. I'm all in - either I make out with everyone else or I go down with the ship.

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Chan_va
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Re: Hedging RSU's

Post by Chan_va » Wed Jun 20, 2018 9:56 pm

GoldStar wrote:
Wed Jun 20, 2018 7:22 pm
Be careful - don't know how large your hold is and how much you are planning to hedge but if you have access to significant insider info and are hedging significant value you are opening yourself up to potential investigation if things do go sideways (there is a reason why many companies have policies against doing this...)

Personally I would never hedge my RSUs. I'm all in - either I make out with everyone else or I go down with the ship.
Good point. I guess puts on qqq would be a better option.

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mrspock
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Re: Hedging RSU's

Post by mrspock » Wed Jun 20, 2018 10:12 pm

GoldStar wrote:
Wed Jun 20, 2018 7:22 pm
Be careful - don't know how large your hold is and how much you are planning to hedge but if you have access to significant insider info and are hedging significant value you are opening yourself up to potential investigation if things do go sideways (there is a reason why many companies have policies against doing this...)

Personally I would never hedge my RSUs. I'm all in - either I make out with everyone else or I go down with the ship.
+1 on this advice. I know 1/5 of FAANG doesn’t allow this sort of thing (reasonably sure on 1 other), and even if the others did you might risk your job (bad PR for company if it ever got out... welcome to “at will” employment). Just isn’t worth the risk IMO. Be thankful for the RSUs/comp and reduce portfolio risk with other mechanisms.

madbrain
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Re: Hedging RSU's

Post by madbrain » Wed Jun 20, 2018 10:55 pm

Read the company's insider trading policy carefully. Most will prevent all current employees from trading derivatives, ie. hedging.

Tanelorn
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Re: Hedging RSU's

Post by Tanelorn » Thu Jun 21, 2018 6:37 am

OP - You should ask yourself if you want downside protection and still have upside to further gains (in which case you want puts, but they will be very expensive), or if you are happy with today's price and just want to lock it in from further changes between now and when you vest and can sell (in which case you should sell short, very inexpensive). Shorting is basically selling now, which is usually the best choice in these situations. Short selling not a "derivative" so it may not be excluded under a company trading policy that talks about trading options.

Every thread about hedging stock based comp has tons of people showing up and making scary noises about company policies, insider information, and looking bad to others at the company. Compare this to every thread about selling company stock, and everyone will tell you that you should absolute diversify, not hold any company stock due to correlated job risk, and sell ASAP for risk reasons.

In practice, most companies don't care what you do, most employees don't have material inside information, and you can just not tell anyone at work. Check your own situation for the details, but hedging is reducing risk and if you're asking this question, you know in your gut that the stock is way up, maybe for an unsustainable reason, and you've got a big bet with lots of risk you want to reduce (i.e. NFLX up almost 100% YTD). Looking into hedging is appropriate and if you've got enough capital available, shorting is usually the best cheapest choice; options need less capital but are more costly.

Good luck.

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