General Forum

1 investment question

Posted By: Fezzik
Date: 15 Aug 01, 2:29 am

In Response To: Agree (Don Schlesinger)

Many employees now are being granted stock options that have 5 or 10 year expirations, and strike prices equal to starting price. Just for fun, let's use Joe Q Public

Age 40
Assets: $50,000
Annual Income: $50,000
Options granted: 200 per year, 10 year window

Price: 1997-2001: 100 (the stock has bounced up and down but been at 100 boy each year). So our hero now has 1000 options. The stock soars in 2001 to 150. No one has any idea what it will do in the future.

Many ees are (or were during the bull market) facing this dilemma. A good percentage of them were cashing all (100%) of their options out for the quick 50k. I was always one to roll the dice and run em long. In fact, I was shocked at how afraid people were to be rich. They would rather grab a small payout, get smashed on taxes, and then buy a car, rather than roll forward with a huge future PV, even with great risk.

Of course, this example is much different from the decision to sell a stock, since the deferred value of the option is so much higher as the stock appreciates. However, I am curious as to your opinion. If the B.Scholes pricing model, for example, using reasonable assumptions calculated the value of the options at say 120k vs. the 50k you could realize, would you look to sell any of the options?ons. Obvously, a full payout is silly. I wouldn't sell any unless I was absolutely forced to come up with money for an emergency.

I'm sure you would like to have more complete info. Feel free to make up reasonable assumptions about facts ommitted. This question is already twice as long as I wanted it to be!

Messages In This Thread

How to handle the "huge exposure game" -- Fezzik -- 12 Aug 01, 11:53 pm

So, will you be hedging against the Mariners in October? -- James -- 13 Aug 01, 12:33 am

Difference between A's and Eagles -- StevieY -- 13 Aug 01, 11:35 am

that's not a hedge -- docriver -- 13 Aug 01, 12:10 pm

Yes and no -- StevieY -- 13 Aug 01, 12:33 pm

risk -- docriver -- 13 Aug 01, 1:04 pm

Hedging -- StevieY -- 13 Aug 01, 1:38 pm

Example please? -- docriver -- 13 Aug 01, 1:56 pm

Example -- StevieY -- 13 Aug 01, 5:36 pm

because you have 40x in equity now -- docriver -- 13 Aug 01, 6:01 pm

above title should read : 18x, not 40x (nt) -- docriver -- 13 Aug 01, 6:08 pm

You aren't wagering 18,000+ -- StevieY -- 13 Aug 01, 6:11 pm

Agree to disagree -- docriver -- 13 Aug 01, 6:20 pm

You are both right, even disagreeing -- Fezzik -- 15 Aug 01, 1:32 am

Size your bets according the payoff, not the bet size. -- Stanford Wong -- 13 Aug 01, 6:39 pm

he really has found some arbitrage -- Math Boy -- 13 Aug 01, 8:21 pm

You can always overbet if the marginal EV from betting more is less than th -- docriver -- 13 Aug 01, 8:41 pm

Practical issues -- James -- 14 Aug 01, 11:27 am

i'm the minority -- docriver -- 13 Aug 01, 8:38 pm

hedging futures bets -- rainmandon -- 21 Aug 01, 7:51 pm

I understand the bet... -- StevieY -- 21 Aug 01, 7:58 pm

hedging futures -- rainmandon -- 21 Aug 01, 9:22 pm

I understand the bet... -- StevieY -- 22 Aug 01, 6:40 pm

Sea hedge -- Fezzik -- 15 Aug 01, 1:34 am

Oops.......I showed my Sea Bias -- Fezzik -- 15 Aug 01, 1:36 am

I'm in the same boat. I won't hedge. -- Stanford Wong -- 13 Aug 01, 8:57 am

Risk-averse betting? -- John May -- 13 Aug 01, 9:14 am

Agree -- Don Schlesinger -- 14 Aug 01, 1:11 pm

1 investment question -- Fezzik -- 15 Aug 01, 2:29 am

Attempt at some answers -- Don Schlesinger -- 15 Aug 01, 8:13 am

how much does money mean to you? -- docriver -- 15 Aug 01, 8:39 am

In-the-money options -- Jaeger -- 23 Aug 01, 6:44 pm

No -- Don Schlesinger -- 23 Aug 01, 8:55 pm

Risk-averse betting? -- lepto -- 14 Aug 01, 1:33 pm

Your bet suffered turf toe -- McNabb#1 -- 14 Aug 01, 4:24 am

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