The *Insight Ratio® is a powerful metric that indicates when it is timely to exercise employee stock options and diversify the proceeds (that is, take some money off the table). The option holder, probably with the assistance of a financial advisor, selects an Insight Ratio, say 10% that is appropriate to her financial situation (e.g., risk tolerance, level of concentration in company stock and options, and time to retirement). The key is to follow the discipline of exercising and selling the underlying stock when the Insight Ratio drops below the target, as the opportunity may well be transitory. By way of example, assume that a hypothetical Intel employee holds an option with the following characteristics:
- Grant date: January 6, 2003
- Number of shares: 5,000
- Expiration date: January 6, 2013
- Exercise price: $17.18
- Insight Ratio® Trigger 10%
The Insight Ratio® dipped below 10% on May 18, 2011 when the stock closed at $23.88 per share. Unfortunately, she did not immediately take action. By August 10, 2011 the close was $19.93 and the Insight Ratio® had climbed back above 27%. If she would have cashed out on May 19 (the next trading day after the Insight Ratio trigger was reached) at the closing price of $23.54, she would have realized $31,800 compared to $13,750 on August 10. Will the stock price get back above $23.88 per share before expiration of the grant? No one knows, but she probably would have been delighted on August 10 if she had taken her money off the table at $23.75 per share.
Following the discipline of exercising and selling based on the Insight Ratio®, doesn’t ensure maximum results, but does provide substantial wealth building profits while minimizing the risk of future adverse market conditions.
* For more information on the Insight Ratio® watch the “Insight & VaR Ratios Concepts” video.