Five Things You Should Know About Your Stock Options
If you own stock options, prudently managing your options in an effort to maximize their value - while at the same time minimizing the risks involved - may be one of the most important financial planning and investment challenges you face. Here are five important considerations:
1. Your Forfeit Value
This is the potential value you forfeit if you leave the company. In order for the forfeit value to be accurate it must include a time value calculation. Most people ignore this fact. We use a sophisticated program to provide our clients accurate forfeit value calculations.
2. The Upside & Downside Leverage
Assuming a 20% change in stock price, a leverage calculation will show how much your portfolio will increase or decrease. This illustrates the tremendous leverage that options provide on the underlying stock and it can be very helpful in deciding when to exercise, hedge or continue to hold options.
3. The Stock Price that Meets Your Goal
This will help you avoid taking excess risk when your options have appreciated enough to realize your financial goals. Clearly defining your goals and knowing what stock price will get you there helps you to make intelligent decisions as to when to exercise and/or hedge your options.
4. Your Degree of Company Concentration
We all know what can happen when you have too many eggs in one basket, but your exposure can be hard to gauge when it is spread across your restricted stock awards, stock options, and common stock. Knowing the percentage of your portfolio you have exposed to your company as well as the maximum percentage of your net worth you are comfortable having in one company will guide decisions to exercise, hedge or hold stock options.
5. Your Insight Ratios
These ratios show you the remaining theoretical value for each stock option grant. Knowing these ratios will help instruct your decision to exercise options as they approach their full theoretical value.
At Financial Alternatives, we use a sophisticated software program called StockOpter to calculate the five items listed above. We use these figures in conjunction with other tools and private consultations to help our clients make more informed decisions about their stock options or other equity compensation.