For the long run of 5 years or more, what is better: leaving the company's stock options unexercised until I need the cash or exercise early and owning the stock? I mean here tax, earnings and other issues. The stock option is already in the money.... As an example, let's say I have options for 1000 shares of X stock currently at $50. The last exercise date is 5 years from now and the strike price is at $40...
if u exercise early an option so long dated u gonna lose a lot of money in premium value that u have to give up. absurd to do it imo.
What is you plan? Let say after you exercise if, are you planning on selling it. If not, keep the cash to earn interest or invest.
OK, let's do the math: 1. I exercize at the current $50 and let's say in 5 years the stock is at $70. I made $30 on each stock plus dividens. But my money was tied down in the stock. 2. I exercize after 5 years and sell, but didn't have the earnings and my stock selling might get taxed at short term trade which is higher, if I am correct on this one. So although my money is not tied down I don't earn dividends and got a worse taxtreatment. Also if I own the stock with a stop loss it is easier to get out quickly if there is a sudden downturn, then trying to exercize first the option then getting out of the position...
It all depends on your long term view. If you want out, sell optiosn equl to teh exercise so that you get all of the premium out. Then in effect you are flat. All depends wether you belive in teh comapny or not.
If you have LEAPS that are in the money, I dont understand why you would want to sell it and buy the stock. By doing that you are assuming much more risk than you have right now. But like the above poster said, its if you believe in the company. If you dont, then get your money out of there, but if you do keep it in the options. I wouldn't take it out and buy the underlying stock though...that just doesn't make sense.
Don't forget when you exercise an employee stock option you owe tax (at your earned income rate) on the difference bewteen the exercise price and the strike.
Thanks for the input. To complicate matters, there are different strike prices with different exercising dates. Here is what I am thinking: Let's say there are a $40 and a $45 strike price options and the stock is around $50. Supposed they have the same exercizing dates, if I need money it makes more sense to exercize the 45 option because the danger of the stock dropping and that option losing its value is more than with the lower strike price and I have to pay less tax on the difference between the strike and the current price. Correct?