John,Strikeout wrote:To: Wagner and Grok.
The vast majority of employee stock options have no intrinsic value (i.e. exercise prices that are either greater than the present market prices) or have an intrinsic value less than 65% of the exercise price.
The great majority of employee stock options are on stocks that are reasonably volatile and have little or no dividend.
The great majority of existing employee stock options are less than 8 years old, especially if you exclude those held by CEOs to near expiration.
Given the above, why do you guys focus on employee stock options that are in the vast minority.
The vast majority of existing ESOs are candidates for hedging strategies if the holders are interested in reducing risk and enhancing their value with lower taxes (I do exclude those that are held by officers and directors that are at or out of the money, where the executive holds no stock).
The strategy of premature exercise , sell stock, and diversify has merit in only very few cases and is far inferior to efficient hedging strategies in most cases. And those are where the stocks have little or no time premium remaining. But all of the ESOs which now have little or no time premium, once did have substantial time premium which was entirely at substantial risk.
So what is the purpose of focusing on a small majority of cases when the great majority gets ignored?
It's a good point. I for one think that hedging could be a valuable tool. It's nice to have an option expert (negative theta? I must have been absent that day from CFA class!) such as yourself posting on this topic.
But I agree with Andy that your example is not what we need. Here's what I think we need- I'll illustrate with an example:
Say an employee is granted 1000 options at 20 for 10 years. 5 years later the stock is at 30. It would be nice to be able to hedge to accomplish the following objectives:
1) Lock in the $10,000 intrinsic value
2) At the cost of giving up some, but not all upside from the stock.
3) Say you would get some fraction (50%? 70%?) of future upside beyond $30 per share for the next 5 year period.
Got anything in your toolkit that would accomplish that?
Or do we have to buy the book?