Know When to Hold’em

Written by Tom Presley, CPA, CFP®, PFS on November 3, 2013

One of the most important questions we address for our Executive clients is: “When should I exercise my stock options?” It’s a valid question, and if the client has a large number of options or a significant portion of their wealth is directly tied to their company’s stock performance, it can be one of the most important questions we ever help them answer. But what I’ve found is by the time people seek professional help on this topic, they’ve usually already received “advice” from their co-workers and friends around the water cooler. In an effort to try and beat those coworkers and friends to the punch, I thought I’d go ahead and tell you the answer you will probably get from me and any of the other advisors or planners at Brightworth: IT DEPENDS.

There are many methods available to stock option holders in determining when the “perfect” time to exercise a tranche of stock options. You could rely on your gut instincts, you could go with what everyone else is doing around the office, you could try and read into the latest analyst estimates or quarterly earnings release, or you could take my advice and rely on Kenny Rogers. The clients that I have an opportunity to serve probably know by now that I am big on analogies - trying to explain complex financial issues in a way that can actually be understood - and stock options are no exception. I can run the Black-Scholes Model all day long (and I’m happy to), or, I can quote a few lines from Kenny Rogers’ “The Gambler:”

You got to know when to hold ‘em,
Know when to fold ’em,
Know when to walk away
And know when to run

You should probably hold ‘em if you:

  • Do not have a specific cash flow need for the option proceeds
  • Are debt-free
  • Have already reached financial independence with prudently diversified assets
  • Are in an abnormally high tax year already
  • Believe your company’s stock price will be higher before your stock options expire

However, by prudently taking some of the gain off the table when your stock options are “in the money,” not waiting too close to the expiration date to seriously consider exercising your options, and by avoiding the temptation to always wait for one more dollar in stock price, you may avoid having to fold ’em.

You should probably walk away if you:

  • Know your stock options have generated enough gain to provide for a specific cash flow need (such as paying for your child’s college)
  • Have generated enough gain for you to reach financial independence (assuming you exercise your options and reinvest the proceeds in a prudently diversified strategy)
  • Are in an abnormally low tax year
  • Believe your company’s stock price will be flat or lower between now and when your stock options expire

It’s true that you might be better off if you held your options a little longer should the price of your company stock continue to rise, but there is something to be said for walking away with a bird in hand. If your stock options have generated more than enough gain to provide for a specific cash flow need or allow you to reach financial independence, what are you waiting for? Run! I always keep in mind a comment a client shared with me once: “Little pigs get fat. Hogs get slaughtered.”

So what should you do with your stock options? It still depends. Our Brightworth team will be happy to help you determine what you specifically should consider doing with your stock options and/or the proceeds from your stock options. I just caution you not to count your money when you’re still sitting at the table. There will be time enough for counting when the dealing is done!

The information contained in this article is intended to be educational and informational in nature. It should not be construed as specific investment, legal or tax advice for your particular situation. Please consult a Brightworth Wealth Advisor with any questions. Also remember that with investing, past performance is not a guarantee of future results.