There is no reason, other than option expiration, to exercise the option on a rising stock as you are fully participating in the rise in stock value.
Actually, Don, there is a somewhat arcane reason to exercise options early on a stock you expect to rise, assuming that you can afford to carry the stock as long as you expect it to continue to rise. I'm assuming that most of the WIND stock options are the so-called "non-qualified" kind, rather than Incentive Stock Options, which are taxed more favorably.
When you exercise non-qualified options, you are taxed on the difference between the strike price and the market price. That is automatically taxed as ordinary income, which for WIND's senior managers would be 39.6%. If you had bought the stock earlier, when the price was lower, you would have paid less tax. If you continued to hold the stock to the same point as the options expired (assuming that you hold it at least a year), and then sold, the difference between the original strike and the price you sell at would be taxed as long-term capital gains, which are half the rates on ordinary income. Accordingly, you could save a bunch of tax in the process.
I heard about this from a fairly well-known financial planner. Even if you don't have the scratch to buy the stock and hold it, many brokerage firms can structure a plan using margin loan, option writing, etc. Your returns won't be as good as if you could put up all the money up front, but it still may be attractive. The risk in the "convert and hold" strategy is of course that the stock price may decline; waiting to convert until close to expiry removes the market risk factor.
Hope this helps shed a little more light on a fairly obscure subject.
Regards,
CMason |
