By: Andrew Rosen, CFP®, CEP®

In parts one and two, I reviewed the intricacies of stock options and their impact.  Let’s now dive a little deeper. Here are a few of my favorite Equity Award Planning strategies.

Hopefully, you’ll find them beneficial as you work on personal strategies to maximize these potential game-changing investments!

Two important factors.

Because of the below two factors, it’s important you create a strategy which appropriately removes you from these positions.

  1. First, if you receive company stock options, generally you are heavy tied to that company. Your salary, benefits, bonus, pension, restricted stock units, etc., are contingent on continued employment with that company.
  2. Second, a stock option is a leveraged relationship. This means a dollar movement in the actual company stock has an exponentially larger impact to your total value (over you holding the stock outright).

Strategy 1: Utilize Dollar Cost Averaging.

I’ll start with my favorite strategy for liquidating company issued stock options — dollar cost averaging!  We’ve all heard about dollar cost averaging into the markets.  But, what about flipping it on its head and dollar cost averaging out of the markets?

Think about it, why do we dollar cost average anyway?  It’s a way to ensure an average price on acquiring stock over a certain period of time.

If dollar cost averaging is reversed, how does that work?  For starters, establish the expiration date of these options.  From there, you work backwards.  You’ll establish a given time before that expiration date and start dollar cost averaging out.  For illustrative purposes, let’s assume 2 years from expiration to begin this process.  Also, let’s assume the option is a 10 year option.  We typically want to start with the expiration date when utilizing this strategy; generally, we expect the stock value to increase over time.

Next, you create the frequency of exercising these options (i.e. dollar cost averaging out).  (I prefer quarterly when utilizing this strategy.)  Therefore, over the last 8 quarters of this options shelf life, systematically liquidate every quarter on the quarter.  Don’t let the price, greed, or fear get in the way.

What you have now effectively done is:

  1. Given your options maximum time to appreciate.
  2. Taken any emotion out of the decision making process.
  3. Assured yourself the average price over the given time period.
  4. Have an actual strategy for handling your options!

Strategy 2: Find your number.

The first strategy is a great one, but it really tries to maximize the end result.  This next strategy is much more planning focused.  I liken this to “a bird in the hand.” In figuring out your number (or stock price) which gives the desired yield, you have to shift your thinking.  Focus more on the impact these dollars have on your financial goals.

Create a spreadsheet to understand what certain dollar increases mean to your net value.  From here, you have a working model to understand the impact of specific stock prices to your pocketbook.  Then, sit down with your financial planner (or someone who can help look at things objectively) and figure out what you would like to accomplish with these dollars.

I’ve seen many items on this list, including:

My point is this: if these dollars hit a price which allows you to accomplish your dreams… then what are you waiting for?!  Put a limit order at your goal price and don’t think twice.

It’s common for people to change this sell price once the price gets close to the target.  I caution you not to adjust, except in extreme circumstances.  Fact of the matter is, you’ve done it. You’ve hit your goal!  Why in the world would you ever want to jeopardize that?  Remember the old adage: Pigs get fat, hogs get slaughtered.

Strategy 3: Combination of both. 

The last strategy is a combination of both.  Depending on the amount of options you’ve received, this might be a prudent solution.  Let’s say you want to pay off your mortgage, or fund your child’s college tuition.  Maybe there is a number which allows you to exercise some of your options and helps achieve a stated goal.  Then, you can “roll the dice” on a bigger pie in the sky goal.

Perhaps you can have your cake and eat it, too!

Final thought.

These are three of the many strategies you can implement to handle your employer issued stock options.  These happen to be a few of my favorites, however.  It is important to remember no matter what, have a plan for them when issued.  All too often I see people “winging it” and getting in their own way.  Don’t risk these plans on emotions or a “gut feeling.”  With the volatile and risky nature of stock options, it generally behooves you to have a plan in place.

Remember that’s what we aim to do here at Diversified, so let’s put that plan into motion!

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Andrew Rosen

In his role as Financial Planner, Andrew forges lifelong relationships with clients.  He coaches them through all stages of life and guides them to better achieve their life goals.  For more information about Andrew or the other firm partners, Kyle Hill and David Levy, click the link below.

Find out more about Andrew Rosen, CFP®, CEP®
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