Company Stock Options - Strategy

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drs

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If you work at a company that has granted you stock options that are currently out of the money, (ex: stock at 25, you have options at 50) does it make sense to write calls at the same strike price as your options are at if you feel the stock may not recover to the strike price?

My questions are: Would this generally be permissable by your company, and would this be a smart thing to do?



Edited 1 time(s). Last edit at Monday, August 6, 2007 at 10:35PM by drs.
 
No, it doesn't make sense to exercise your options at 50, then sell calls.

Why buy it at 50 when you can buy it at 25?


If you are not going to exercise them, then it's similar to writing naked calls. It is not covered because you don't own the stock, only the right to buy it at 50 which isn't worth squat.

Selling naked calls is fine if the stock doesn't go up.
 
The question wasn't whether it makes sense to exercise the options at 50. They are out of the money.

This should be a riskless transaction if I sell the calls at the same strike price as my options, correct?
 
I suppose if you have stock options that are OTM, then you might as well sell them. However if they are company granted, maybe you can only exercise them, not sell them.

So then maybe you want to sell a synthetic call, which would be something like short the stock and buy a put. Seems like a pain in the butt to me, since if they are deep OTM, you're only getting the time value, which may not amount to much, but this would require less experience and credibility than selling naked calls.
 
sorry... synthetic call is short the stock and sell a put, not buy a put. The money from the short sale is collateral for your put, and if you get exercised before expiration, the difference between the put premium you bring in and the sale price of the stock is the time value.
 
drs Wrote:
-------------------------------------------------------
> The question wasn't whether it makes sense to
> exercise the options at 50. They are out of the
> money.
>
> This should be a riskless transaction if I sell
> the calls at the same strike price as my options,
> correct?


I guess it is riskless if you can deliver the stock without any issues.
 
Yes, company granted, so I can't sell them only exercise them...

Why do a synthetic instead of writing the calls?
 
If you can use your stock options as collateral for the calls you are selling, then selling calls rather than synthetics probably would be fine. However, company granted stock options typically have very long times to expiry, and you'd want to match your expiration dates. Or maybe you could just roll over earlier expiring options and collect premium rents.

Also, if you are fired or laid off and the options haven't vested then you could be in big trouble if you are still on the hook for the options you've sold. I suppose you could buy an offsetting call at the time to neutralize your exposure - just hope that the options aren't way in the money if/when that happens.



Edited 1 time(s). Last edit at Tuesday, August 7, 2007 at 11:05AM by bchadwick.
 
Does anyone know if you can you use stock options as collateral for writing calls?
 
Employee stock options aren't assignable so you can't use them as collateral. There's a big mismatch between exchange traded options and employee stock options as bchadwick points out.

Further, selling calls on your own company is likely to viewed as poor behavior. Depending on your position and a bunch of other stuff, it may be a reportable sale under Sarbanes-Oxley (but this is beyond my expertise).

This is a dumb idea. If your company sucks and your compensation is aligned with it, you should be shopping your resume not waiting to vest in employee stock options that you won't be able to exercise.
 
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