Should you cash out stock options?
Whether your options have value
Exercise and/or Sell As Soon As Possible
Many companies issue stock compensation with a schedule that's tied to a period of time you must remain with the company in order to receive the value of the plan benefit. Your first opportunity to take action is often whenever your stock options or grants are fully vested.
A generous stock option benefit is certainly nothing to complain about. But it does have a significant riskāthe possibility that too much of your wealth will be tied up in a single stock. As a general rule, you want to avoid having more than 10% to 15% of your portfolio tied to a specific company.
Because if you don't exercise your options before the expiration date, they will be worth absolutely nothing. Nada. Zip. Options are very much a use-it-or-lose-it proposition, and it could be very painful to ālose itā if your strike price is below the current fair market value of the common stock.
If your options remained āout of the money,ā then you'd probably do nothing and let your stock options expire on the expiration date since they have no value.
Can I Cash Out My Employee Stock Purchase Plan? Yes. The payroll deductions you have set aside for an ESPP are yours if you have not yet used them to purchase stock. You will need to notify your plan administrator and fill out any paperwork required to make a withdrawal.
That said, the short answer is that you probably should sell your ESPP shares immediately after purchase. If you're new to ESPPs, we suggest that you acquaint yourself with ESPP Basics. You may also find it helpful to read our thoughts on how much you should contribute to your ESPP.
The Downside Risk. If pay is truly to be linked to performance, it's not enough to deliver rewards when results are good. You also have to impose penalties for weak performance. The critics claim options have unlimited upside but no downside.
Selling options can provide a cushion against losses due to the upfront premium received. This premium offsets some of the risk and can turn what would have been a losing position into a break-even or slightly profitable one.
When you sell an option, the most you can profit is the price of the premium collected, but often there is unlimited downside potential. When you purchase an option, your upside can be unlimited, and the most you can lose is the cost of the options premium.
Why would you not exercise an option?
It rarely makes sense to exercise an option that has time value remaining because that time value is lost. For example, it would be better to sell the Oct 90 call at $9.50 rather than exercise the contract (call the stock for $90 and then sell it at $99).
With an options contract, you are not obligated to take any action. If the contract is not fulfilled by the due date, it automatically terminates. Any option premium you paid will be returned to the vendor.
There are also time limits on when you can exercise stock options. Most options expire ten years from the date of grant. Further, if you are laid off before you are vested in your options or your company is acquired, you may lose unvested options. All these details should be in your stock option agreement.
Trading options for a living is possible if you're willing to put in the effort. Traders can make anywhere from $1,000 per month to $200,000+ per year.
You have taxable income or deductible loss when you sell the stock you bought by exercising the option. You generally treat this amount as a capital gain or loss. However, if you don't meet special holding period requirements, you'll have to treat income from the sale as ordinary income.
Can companies let employees convert their vested stock options into cash instead of exercising them? Yes, it is possible for companies to allow employees to convert their vested stock options into cash instead of exercising them.
Employees do not owe federal income taxes when the option is granted or when they exercise the option. Instead, they pay taxes when they sell the stock. However, exercising an ISO produces an adjustment for purposes of the alternative minimum tax unless the stock is sold in the same year that the option is exercised.
Options give management an incentive to take too much risk. Stock and stock options are also inefficient compensation because of their high discount rate. Employees undervalue stock and stock options because they are under- diversified. Employee capital gain, available on stock, is usually to be avoided.
Distributions before age 59-Ā½ or for death, termination after age 55, or disability are subject to a 10% penalty tax. Employees can roll distributions over into a traditional IRA or another qualified retirement plan to defer taxation until the funds are withdrawn according to regulations.
Under a Ā§ 423 employee stock purchase plan, you have taxable income or a deductible loss when you sell the stock. Your income or loss is the difference between the amount you paid for the stock (the purchase price) and the amount you receive when you sell it.
What is the 2 year rule for ESPP?
ESPP Tax Rules for Qualifying Dispositions
A qualifying disposition occurs when you sell your shares at least one year from the purchase date and at least two years from the offering date. If you trigger a qualifying disposition, you may be subject to ordinary income tax and/or long-term capital gains tax.
If your company offers one, why should you invest in an ESPP? Since you are acquiring stock, that would otherwise not be available, at a discounted price it is generally a good idea to participate. ESPPs offer an easy, cost-efficient way to pursue a disciplined savings plan.
Employers offer stock options to employees to encourage them to remain with the company for a long period. Although they may not have a high value at the time of receipt, stock options can become valuable to an employee over several years.
Size of the option pool
A good starting point when thinking about option allocations, is to consider the total sizeof the option pool. A typical employee stock option pool at pre-seed round is about 12-15%, diluted to 10% at series A.
If the underlying stock is priced cheaper than the call option's strike price, the call option is referred to as being out-of-the-money. If an option is out-of-the-money at expiration, its holder simply abandons the option and it expires worthless. Hence, a purchased option can never have a negative value.
