Cashing in my options
 

I have about $20k in vested employee stock options with Intel. Any opinions on whether or not I should cash them out? Is there a good strategy for cashing out options?

If option grant A is above water at $20/share and grant B is above water at $22/share which should I sell first? I was thinking I should sell B first because then if the price drops to $22/share I would still be able to sell A for something.

Re: Cashing in my options
 

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I have about $20k in vested employee stock options with Intel. Any opinions on whether or not I should cash them out? Is there a good strategy for cashing out options?

If option grant A is above water at $20/share and grant B is above water at $22/share which should I sell first? I was thinking I should sell B first because then if the price drops to $22/share I would still be able to sell A for something.

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when do your options expire? do they?

Barron

Re: Cashing in my options
 

They expire years from now. I have about 8 different grants with prices between $15 and $30.50. The first ones expire in 2011, and the last ones expire in 2015.

I am bearish on the company (should I be). The stock is trading at a 27 PE ratio and has been on a good run since winter. I think a 27 PE is too high for Intel which is realistically no longer a growth stock. Any future earnings are going to be grown through cost reductions at this point. They don't have any good strategy to prevent the complete commoditization of their current product, and there aren't any new products on the horizon that would really boost the bottom line. I would love to see them become a big player in cell phone processors, but they haven't made many inroads so far.

The upside is that intel moves with the market these days, so if the S&P and Dow continue to do well, Intel shares could rise as a result. I don't believe the fundamentals point towards owning these shares however.

Re: Cashing in my options
 

Also, how long do you plan on staying with INTC? Typically employee options expire in ten years or when you leave. If you believe you can hold them for a long period you would be giving up some significant option value. For example, the Jan 2010 $20 call options are selling for almost $9, effectively you would be selling more valuable (if the expiration can be longer than 2.5 years) options for only $6 and paying taxes to boot.

For example of the benefit of long dated options, if you think INTC is fairly valued now, and will appreciate at 10% per year, then you might expect it to trade around $35 in three years, making exercising your $20 options worth $15 instead of $6. That's a 150% increase in option value froma 35% increase in the underlying stock, showing how the leverage of options can pay off over long periods.

This assumes you are comfortable estimating Intel's real value. If you think it's significantly over valued then selling the options is probably reasonable. If you can't estimate Intel's value, then think about it as a portfolio allocation problem.

My usual approach to employee options was to view them as a component of my entire portfolio, i.e. my net worth. If options are a large percentage of your savings, and are greater than a years income, you should think about lowering their allocation. If they represent a small portion of your earning power or net worth, then holding as a speculation is probably fine.

And if you ever think your employer is struggling and your job is at risk, you should always lower exposure to their stock. You don't want the stock to crash at the same time you get laid off.

Also it's been a long time since I dealt with employee options, but the usual strategy was to exercise, and hold a year to get long term capital gains. This burned a lot of people during the bubble. Not sure of the correct tax strategy today but you should research the tax implications.

Re: Cashing in my options
 

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If option grant A is above water at $20/share and grant B is above water at $22/share which should I sell first? I was thinking I should sell B first because then if the price drops to $22/share I would still be able to sell A for something.

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you should sell A first.

if the price stays above $22 for all your sales, you make the same amount of money regardless of the order you sell them in.

if the price is above $22 now and below $22 a year from now, you make more money by selling A now than by selling B now and A a year from now.

always sell the options with the lowest strike price first (if they have the same expiry date).

generally, if your options are just barely in the money and you have a long way to go until they expire, you should hold them. if they're well into the money, you should probably sell and diversify.


in general, if you're not worried about diversification and want to maximize your EV, you should hold them until just before they expire. holding onto them is similar to being in any other leveraged position, except you still have the chance to make money after your position goes underwater.

in other words, the options are worth more than the difference between the stock price and the strike price. that difference is greater the further you are from expiry, and the closer the stock price is to the strike price.

Re: Cashing in my options
 

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They expire years from now. I have about 8 different grants with prices between $15 and $30.50. The first ones expire in 2011, and the last ones expire in 2015.

I am bearish on the company (should I be). The stock is trading at a 27 PE ratio and has been on a good run since winter. I think a 27 PE is too high for Intel which is realistically no longer a growth stock. Any future earnings are going to be grown through cost reductions at this point. They don't have any good strategy to prevent the complete commoditization of their current product, and there aren't any new products on the horizon that would really boost the bottom line. I would love to see them become a big player in cell phone processors, but they haven't made many inroads so far.

The upside is that intel moves with the market these days, so if the S&P and Dow continue to do well, Intel shares could rise as a result. I don't believe the fundamentals point towards owning these shares however.

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Sorry, cross posted as you were posting. This sounds like a sell. Selling your lower cost options probably is the best strategy as if Intel goes on a run you'll still profit from your higher cost options.

Re: Cashing in my options
 

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They expire years from now. I have about 8 different grants with prices between $15 and $30.50. The first ones expire in 2011, and the last ones expire in 2015.

I am bearish on the company (should I be). The stock is trading at a 27 PE ratio and has been on a good run since winter. I think a 27 PE is too high for Intel which is realistically no longer a growth stock. Any future earnings are going to be grown through cost reductions at this point. They don't have any good strategy to prevent the complete commoditization of their current product, and there aren't any new products on the horizon that would really boost the bottom line. I would love to see them become a big player in cell phone processors, but they haven't made many inroads so far.

The upside is that intel moves with the market these days, so if the S&P and Dow continue to do well, Intel shares could rise as a result. I don't believe the fundamentals point towards owning these shares however.

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sounds like you've thought it through and have a good handle on the situation.

another thought is that despite commoditization, huge growth in the demand for computers from china/india in teh future could still push the share price up. 27xearnings though is a bit high i agree.

only advise i could intelligently give is "don't sell the $30 options first" lol.

sounds like you could sell the most in the money now and work backwards given your view of the company.

Barron

Re: Cashing in my options
 

Thanks for the help. I am probably going to sell some portion of them since I believe intel is overvalued currently. I'll let the rest ride. [img]/images/graemlins/smile.gif[/img]

Re: Cashing in my options
 

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If option grant A is above water at $20/share and grant B is above water at $22/share which should I sell first? I was thinking I should sell B first because then if the price drops to $22/share I would still be able to sell A for something.

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you should sell A first.

if the price stays above $22 for all your sales, you make the same amount of money regardless of the order you sell them in.

if the price is above $22 now and below $22 a year from now, you make more money by selling A now than by selling B now and A a year from now.

always sell the options with the lowest strike price first (if they have the same expiry date).

generally, if your options are just barely in the money and you have a long way to go until they expire, you should hold them. if they're well into the money, you should probably sell and diversify.


in general, if you're not worried about diversification and want to maximize your EV, you should hold them until just before they expire. holding onto them is similar to being in any other leveraged position, except you still have the chance to make money after your position goes underwater.

in other words, the options are worth more than the difference between the stock price and the strike price. that difference is greater the further you are from expiry, and the closer the stock price is to the strike price.

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generally this is correct.

but if you are exercising a tactical view, you have more than just stochastic modelling to go on, and the down probability of ending in a down state (in this case) is high enough that the ev lost by selling in time value is made up for in reduced intrinsic value if you view the stock as a loser.

alternatively, you could double up your view and sell the most ITM options and use some of the proceeds as margin to short the stock.

Barron

Re: Cashing in my options
 

FWIW, as I don't have any practical experience with employee options programs, but I'd sell it all ASAP if you are bearish on the company. In general, diversification argues against working for a company and holding stocks/options in that company since the two are going to be so strongly correlated. Combine that with your bearishness, and you really want to distance yourself from Intel the stock as much as possible.

But that's ignoring possible tax consequences which you wouldn't want to do obv.

Re: Cashing in my options
 

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generally this is correct.

but if you are exercising a tactical view, you have more than just stochastic modelling to go on, and the down probability of ending in a down state (in this case) is high enough that the ev lost by selling in time value is made up for in reduced intrinsic value if you view the stock as a loser.

alternatively, you could double up your view and sell the most ITM options and use some of the proceeds as margin to short the stock.

Barron

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the value of exercising now is obviously higher if you believe the stock price is going down.

but if you want to lock in what your options are worth, there's better ways to do it. shorting the stock is one possibility, as you mentioned.

the more obvious hedge would be to sell call options with the same strike prices and maturities as the options you hold. you would get more money this way than you would by exercising outright. you could also sell puts and short the stock, which would give you a smoother return than simply shorting the stock. you could get into trouble with margin calls if the stock rises a lot, but in that case you could always liquidate everything - the net result should still be better than exercising now, as by then the call option prices should be closer to the stock price minus the strike price.

Re: Cashing in my options
 

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generally this is correct.

but if you are exercising a tactical view, you have more than just stochastic modelling to go on, and the down probability of ending in a down state (in this case) is high enough that the ev lost by selling in time value is made up for in reduced intrinsic value if you view the stock as a loser.

alternatively, you could double up your view and sell the most ITM options and use some of the proceeds as margin to short the stock.

Barron

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the value of exercising now is obviously higher if you believe the stock price is going down.

but if you want to lock in what your options are worth, there's better ways to do it. shorting the stock is one possibility, as you mentioned.

the more obvious hedge would be to sell call options with the same strike prices and maturities as the options you hold. you would get more money this way than you would by exercising outright. you could also sell puts and short the stock, which would give you a smoother return than simply shorting the stock. you could get into trouble with margin calls if the stock rises a lot, but in that case you could always liquidate everything - the net result should still be better than exercising now, as by then the call option prices should be closer to the stock price minus the strike price.

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now thats the best idea yet. nice job pete.

if you are absolutely neutral on the stock, what is the optimal move here? sell calls on the same strikes and take the premiums risk free i think, right?

if you are negative on the stock then sell puts + short stock + sell calls on strikes?

if you are positive on the stock then hold all and do nothing?

thanks,
Barron

Re: Cashing in my options
 

Are employees allowed to engage in "hedging trades"? I thought that public companies' employees were not. (I work for a public company and it says this in the employee handbook)

It makes sense not to be as it destroys the idea of the options as an incentive for continuous strong employee performance.

Re: Cashing in my options
 

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now thats the best idea yet. nice job pete.

if you are absolutely neutral on the stock, what is the optimal move here? sell calls on the same strikes and take the premiums risk free i think, right?

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if you think the stock and its derivatives are optimally priced, the optimal strategy in terms of absolute EV should still be holding since it minimizes transaction costs. in terms of maximizing sharpe ratio you would want to diversify and i suspect the best way to do that is by selling calls.

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if you are negative on the stock then sell puts + short stock + sell calls on strikes?


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if i've thought this through correctly, selling puts and shorting the stock should be equivalent to just selling calls. so whether you're bearish or bullish on the stock shouldn't really matter in terms of the optimal hedging strategy. the difference is that with the sell put/shell short stock strategy you're essentially borrowing money now with the intention of paying it back when you finally exercise. that should have implications regarding the margin requirements which might be different for options and short selling, and i have no idea which strategy would end up working out better.

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if you are positive on the stock then hold all and do nothing?


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yup, but of course you want to consider your portfolio sharpe ratio again... if you're bullish you'd naturally be holding more than you would otherwise.

Re: Cashing in my options
 

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generally this is correct.

but if you are exercising a tactical view, you have more than just stochastic modelling to go on, and the down probability of ending in a down state (in this case) is high enough that the ev lost by selling in time value is made up for in reduced intrinsic value if you view the stock as a loser.

alternatively, you could double up your view and sell the most ITM options and use some of the proceeds as margin to short the stock.

Barron

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the value of exercising now is obviously higher if you believe the stock price is going down.

but if you want to lock in what your options are worth, there's better ways to do it. shorting the stock is one possibility, as you mentioned.

the more obvious hedge would be to sell call options with the same strike prices and maturities as the options you hold. you would get more money this way than you would by exercising outright. you could also sell puts and short the stock, which would give you a smoother return than simply shorting the stock. you could get into trouble with margin calls if the stock rises a lot, but in that case you could always liquidate everything - the net result should still be better than exercising now, as by then the call option prices should be closer to the stock price minus the strike price.

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now thats the best idea yet. nice job pete.

if you are absolutely neutral on the stock, what is the optimal move here? sell calls on the same strikes and take the premiums risk free i think, right?

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Yeah, that's a good method. I wish I had done that when I worked for a chipmaker and had a buttload of unvested options. I knew about that sort of play but didn't think of it because I was "too close" to the situation.

OP, consider doing that for some of your unvested options as well.

BTW, nobody at Intel is REALLY sure of how long they'll be there. [img]/images/graemlins/smile.gif[/img]

Re: Cashing in my options
 

I've never had employee stock options, as I'm a professional self-employed options traded. This means I don't know the rules for employee options as far as hedging and the like. I will give you a few pointers, though. First of all: Long Call, Short Put = Long Stock. This means that Long Put, Short Call = Short Stock. Long Call, Short Stock = Long Put. Long Put, Long Stock = Long Call. The list goes on but it's pretty easy to derive. Secondly, If you have options that are ITM and expire in several years it is probably a bad idea to exercise them. Options have intrinsic time value which makes them worth more than simply how much they are ITM. It would be a better idea to sell the options on the open market if that is allowed.

RiverDancer

Re: Cashing in my options
 

Employee incentive options are not exchange traded. They are usually not vested when granted, but vest over a period of 4 or 5 years. They are incentive to continue working at the company and build value for the company. When you leave, you forfeit the unvested options but you are usually given a few months to exercise the vested ones. They really have no time premium that you can monetize. You can't sell them, you can only exercise them.

Re: Cashing in my options
 

I would be really surprised if Intel stock matched market returns over the next 5-10 years.

How would I go about selling call options with the same strike prices and maturities as the ones I hold? Can this be done from a normal Scottrade brokerage account? Would this be smart if I believe that I'll be laid off in the future before the expiration dates?

Re: Cashing in my options
 

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I have about $20k in vested employee stock options with Intel. Any opinions on whether or not I should cash them out? Is there a good strategy for cashing out options?

If option grant A is above water at $20/share and grant B is above water at $22/share which should I sell first? I was thinking I should sell B first because then if the price drops to $22/share I would still be able to sell A for something.

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I think that a lot of people who responded to your post are confusing employee stock options with open market options. There are some huge differences.

There are even different kinds of employee stock options, the two most prevalent being incentive stock options (ISO) and non-qualified stock options (NQSO). The tax implications for these two types are very different, so make sure you know what kind of options you have and how the gains will be taxed. The main difference is that for NQSO, it's less advantageous, from a tax perspective, to exercise and hold for a year. I believe that both types trigger alternative minimum taxes (AMT).

If this represents a significant amount of money for you, I would strongly recommend that you consult with a tax accountant. You wouldn't believe how complicated things can get when AMT is involved.

Re: Cashing in my options
 

From what I hear from AMD employees it sounds like things are pretty bad there. Does AMD slipping necessarily mean good things for Intel's stock? Or are you bearish on the whole industry?

Re: Cashing in my options
 

The problems as I see them are with the market, not the individual companies. AMD stumbling is good for intel, but the further commoditization of the market places long term limits on growth.

Re: Cashing in my options
 

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I would be really surprised if Intel stock matched market returns over the next 5-10 years.

How would I go about selling call options with the same strike prices and maturities as the ones I hold? Can this be done from a normal Scottrade brokerage account? Would this be smart if I believe that I'll be laid off in the future before the expiration dates?

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I don't know if Scottrade allows the selling/shorting of naked calls, you'll have to ask them. BTW, this strategy will not help you if you get laid off. The premise is that if the stock suddenly takes off, your brokerage account with the short calls takes a big hit. But your employee options go up by the same amount, covering your brokerage loss. If you get laid off, you lose your unvested options, and thus your protection against a rise in the stock.

Re: Cashing in my options
 

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If you get laid off, you lose your unvested options, and thus your protection against a rise in the stock.

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yeah i didn't consider that. and obviously if you get laid off, that's when you least want to be stuck a lot in a hedge gone bad. you can still go ahead and hedge the vested options though.

Re: Cashing in my options
 

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FWIW, as I don't have any practical experience with employee options programs, but I'd sell it all ASAP if you are bearish on the company. In general, diversification argues against working for a company and holding stocks/options in that company since the two are going to be so strongly correlated. Combine that with your bearishness, and you really want to distance yourself from Intel the stock as much as possible.

But that's ignoring possible tax consequences which you wouldn't want to do obv.

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