{"id":9977,"date":"2021-11-11T16:22:39","date_gmt":"2021-11-11T16:22:39","guid":{"rendered":"https:\/\/zackspcg.com\/blog\/?p=9977"},"modified":"2022-02-26T13:05:37","modified_gmt":"2022-02-26T13:05:37","slug":"tips-for-exercising-stock-options","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/tips-for-exercising-stock-options\/","title":{"rendered":"Tips For Exercising Stock Options"},"content":{"rendered":"\n

Tory G. from Memphis,\nTN asks: <\/em>Good morning, Mitch. I\u2019m writing today to ask about exercising\nstock options. I\u2019m an employee at FedEx and have been trying to weigh the pros\nand cons of exercising my non-qualified stock options this year, and wonder if\nyou have some tips to consider. Thank you!<\/p>\n\n\n\n

Mitch\u2019s Response:<\/strong><\/p>\n\n\n\n

Thanks for writing, Tory, and congratulations on your stock\noptions. Employers generally offer stock options as a form of compensation\nand\/or reward for time dedicated to the company, so I\u2019m sure you worked hard to\nbe in this position. <\/p>\n\n\n\n

Exercising stock options, as I\u2019m sure you\u2019re aware, is a\nrather complex undertaking with many considerations and pros and cons to weigh.\nWithout knowing your financial situation or the details of your grant offer, I\nam unable to offer you specific advice on your stock options. But I can share\nsome high-level thoughts that may help you make a more informed decision.1<\/sup><\/p>\n\n\n\n

First relates to the strike price of your options relative\nto the current market price of the stock. If the stock\u2019s market price at the time of exercising your options is\nhigher than the strike price, the options are \u201cin the money\u201d and you\u2019d be\nobtaining shares likely at an attractive price. However, if the market price is\nbelow<\/em> the strike price, the options are considered \u201cout of the money\u201d or\n\u201cunderwater.\u201d In that case, you may not want to exercise the options at this\nmoment, as you\u2019d pay more to exercise them than you would to simply buy shares\non the open market. <\/p>\n\n\n\n

\n\n\n\n

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The second is a quick note about tax treatment. Non-qualified stock options, or NQSOs, are taxed as ordinary income regardless of the holding period\u2014i.e., you will likely owe ordinary income tax on the difference (or the spread) between the market price at the time of exercise and the strike price. NQSOs are also typically subject to income and payroll tax withholding at the time of exercise, so you\u2019ll just want to be aware of your potential tax liability should you decide to move forward.<\/p>\n\n\n\n

Generally speaking, stock options are an attractive asset to\nhave \u2013 they give you the ability to own stock often at a discounted price to\nthe market. However, as with any\ninvestment, there are also risks worth weighing\u2014and perhaps the top among them\nis concentration risk. <\/p>\n\n\n\n

Amassing a\nsignificant stake in a company via options and\/or shares increases the portion\nof your total net worth attached to a single company\u2014i.e., your total net worth\nmay be heavily concentrated in a single company. However great the company may\nbe\u2014however profitable, fast-growing, etc.\u2014things can always go wrong, and\npossibly quickly.<\/p>\n\n\n\n

Your best defense\nagainst concentration risk is to build a sufficiently diversified portfolio of\nassets. That may mean exercising options to reduce your overall weight in a\nsingle company, and\/or pursuing investments in other non-correlated assets and\nstrategies to create some balance. When considering the benefits and risks of\nstock options, an investor should first survey their entire net worth and\nevaluate the level of single security concentration in your portfolio. The\ngoal, ultimately, is to appropriately diversify a portfolio in an effort not\nonly to control risk but also to expand your opportunity set.<\/p>\n\n\n\n

For those who are thinking about\nretiring soon, we advise you to start preparing for your retirement now. You\nwill have a better advantage when making future financial decisions.<\/p>\n\n\n\n

To help you do this, I recommend\nreading our Retirement Guide.3<\/sup> This guide will give you a\nstep-by-step outline of how you can plan for a successful financial future, and\nit provides our answers to critical questions like:<\/p>\n\n\n\n

  • What is the best long-term approach?<\/li>
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  • How much should you be saving?<\/li>
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    If you have $500,000 or more to invest\nand want to learn more about retirement planning, click on the link below to\nget your free guide today!<\/p>\n","protected":false},"excerpt":{"rendered":"

    Stock options offer a great way to own shares in a company\u2014but Mitch offers a few guidelines to avoid over-concentration<\/p>\n","protected":false},"author":3,"featured_media":7436,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[66,71],"tags":[],"class_list":["post-9977","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitchs-mailbox","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9977","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=9977"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9977\/revisions"}],"predecessor-version":[{"id":10263,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/9977\/revisions\/10263"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=9977"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=9977"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=9977"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}