The stock market has been on a roller coaster the last few weeks, but in general the S&P 500 index is not far from its all time high. Consequently, most employee stock options granted in the last ten years are likely to still be significantly “In-the-Money” (current stock price above the grant price) as illustrated by the above chart.
This chart shows the S&P 500 over the past decade. It can be used as a general representation of the prices at which companies granted employee stock options during this period. Of course, not every stock has gone up in price over the last 10 years, but this index shows that the majority did. The shaded green section represents stock options that are likely to be in-the-money because options are usually granted at the fair market value of the stock on the day of the grant.
Employee stock option value is a function of “when” they were granted. Options granted in 2010 and 2011 have likely tripled in value. Conversely, the market would have to go below 1,000 for all of the grants represented by this index to be “under water” (current stock price below the grant price).
The good news is that outstanding employee stock options are probably still in-the-money right now despite the recent market volatility and declines. But this begs the question, “when should one exercise and sell their options in order to maximize the value?” Clearly, options granted when stock prices were at their lowest should be exercised first, but it’s necessary to have a framework that will enable stock option recipients to manage their options efficiently and effectively. For information on this framework check out the Secret to Profitable Stock Option Exercise Decisions.
Nobody can accurately predict what the stock market will do going forward so it’s a good idea to establish criteria for exercising and selling your stock options in advance and then monitoring your holdings. This way market “corrections” won’t catch you off guard.
Bill Dillhoefer is the CEO of Net Worth Strategies, Inc. a service firm specializing in professional equity compensation risk analysis and tax planning tools. Bill is has spoken at various industry conferences and to numerous advisor groups. Connect with him on LinkedIn or follow him @StockOpter