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Strategies & Market Trends : Technical analysis for shorts & longs -- Ignore unavailable to you. Want to Upgrade?

To: Johnny Canuck who wrote (42787)	11/10/2005 1:29:06 PM
From: Johnny Canuck	Read Replies (1) \| Respond to of 69864

Options: Know when to hold 'em Wednesday November 9, 11:01 pm ET Q: What's the best strategy when you have employee stock options: A) Buy them as soon as you are able; B) Hold on to them until the stock reaches its high; or C) Set a price point and go with it? A: If you're still receiving employee stock options, consider yourself lucky. New accounting rules that go into effect next year will require companies to subtract the value of stock options from earnings, so more companies have been scrapping them. It's hard to blame them, because the costs will be enormous. For instance, Cisco Systems' earnings would have been about 18% lower last year if it had been required to subtract the cost of employee stock options. The cost of stock options under the new rules have become so onerous that even Microsoft has largely stopped issuing them. But none of that answers your question: What to do with stock options if you do have them. Giving a pat answer is difficult, not knowing your entire financial picture. For instance, did you accept a lower salary to get these options? If so, you might need the cash flow from them. If that's the case, you might want to sell them as soon as you vest (just make sure that you hold enough cash back to cover the tax you will owe on the profit). If you joined the company thinking that it's the next Microsoft, your strategy will be completely different. In that case, you will want to hold the options for a long time. After all, why cut your potential gain short? I'm not sure if any of your three options is good. Your first strategy, "buying them as soon as you can," doesn't really make much sense based on how options work. Typically, you don't have much leeway in when you get options. You are granted them by your employer. You use them to buy shares of the company's stock, and in most cases you must buy the stock shortly after you are vested in your options. Your buy price is fixed and doesn't change based on when you exercise them, but you must be alert for an expiration date. Your second strategy, selling when the stock hits its high, sounds good but really isn't practical. You'll never know, until it's too late, whether the stock has peaked. If you sell at a new high, and it goes higher, you could be filled with regret. Your third strategy, setting a price point, makes the most sense. But the question remains, what are you going to set the price based on? My suggestion would be to look at stock options and your company stock as a piece of your overall portfolio. Investment professionals urge workers never to let holdings in their employer's stock be too big a piece of their total wealth. If it gets above 5% you should really start thinking about cutting back and reallocating the money to diversify your holdings. Matt Krantz is a financial markets reporter at USA TODAY. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com.