Should I Exercise My Stock Options?

Answer...

Should you exercise your options in the current market environment?

Options offer three options of their own:

  • Exercise them, sell the stock, take the cash.
  • Exercise the options, hold the stock for the long term.
  • Wait and exercise at the last minute.

Remember: options will help you significantly increase your wealth. If you exercise them immediately, you may be throwing away opportunity for building your financial future. Think before you spend, and treat the options as an investment, not found money.

Here's what to consider when deciding on whether or not to exercise your options:

Are more than 20 percent of your assets in the company? Many people have company 401(k) matching in their company stock such as in employee stock ownership plans.

Is the company stock value at risk? If your company's expectations are poor and the company is not going to turn around, then exercise as soon as you can.

Are your options about to expire? If options will expire within three years, sell them when it seems like the right time and don't wait until the last minute.

Know the rules governing your options.  When can you exercise the options? When do they expire? Do you have to come up with the cash? What are the tax considerations?

If you've decided to exercise your options, then when?

IF you decide to hold until right before expiration, THEN you should do this if you've waited a while to exercise them.  This is a last-minute choice.

IF you decide to exercise for cash (put up $ and hold as investment), THEN you should do this if you really believe the company is going to do well and do not have enough equity exposure to the company.

IF you decide to exercise options for enough cash to buy and hold the remaining shares, THEN you should do this if you want to limit your risk by not putting extra money into the company's stock. This way, if the company does well, you'll have exposure to the company without putting up cash.

IF you decide to exercise and sell all shares to go to cash, THEN you should do this if you have major concerns about stock performance OR you need to diversify and have too much money invested in your company.

by Diahann W. Lassus, CFP®, CPA

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