Let's say an engineer is joining Apple (APPL) and will receive restricted stock units (RSUs) worth $100k vested over 4 years. The number of shares the engineer will receive is: number of RSU shares = $100,000 / P where P is APPL closing price on the day of the first board meeting after the engineer's start date (say, 2/14/2019). Note that Apple's 2018 Q4 earning call will be on 1/30/2019 which historically swings APPL by 10% in either direction. Apple APPL is $154 on 1/17/2019 (today). The engineer is effectively forced to buy $100k worth of APPL in RSU grant on 2/14/2019 at the closing price. If the engineer expects APPL to be higher on 2/14 (say 10% higher at $170), what would be a good way to hedge from today (1/17) to 2/14? (I'm new to option and it's my first post here. Thanks a bunch for all your help! you all for the help!)
The first question does AAPL allow hedging? It's a mix some firms do and some don't. If hedging is permitted it generally must be done in the same account as it doesn't provide good hedging vehicle because as you point out it is restricted. The firm that has the brokerage deal with AAPL(Sometimes more than one) will show the employee some legal solutions and time periods when hedging can be done. What if I want to ignore all that and go out and hedge it myself? Depends on AAPL policy and assuming you don't get into trouble you'll need to do a hedge that doesn't require the RSU capital. Have them ask their HR department as to what, if any hedging. is allowed and does the clock start from the time of the offer. If hedges are allowed and your assumption is correct. 6 collars and position the strikes to fit your view. 6 puts outright or six put spreads - then you would just protect a range. You can also write outright calls and the calls in your collar would need to match the RS time restriction. HR should have all of the info on this and on any loans, you could take out against the hedged restricted stock, I expect it's an academic issue as I suspect hedging at this level is restricted.
Having gone through this, hedging for a potential 10 percent move on a restricted position is prob not worth the effort. I've done it in my own situation (financial) by shorting a competitor....it worked, but at the end the nominal net move was not that significant. I think the bigger issue to remember is that as you accumulate more APPLE through this program is not to fall in love with it too much.
If you are buying shares of AAPL on 02/14/2019, why the hell would you hedge it before you own it? Up to 02/13/2019, you do not own any AAPL shares. Usually, the correct way to hedge a stock position assuming you have a very low risk tolerance is to buy a put option to hedge against your long position on AAPL shares. The put option guarantees you can sell your option at a fixed price for a fixed period of time. In your example, you would have gotten $100,000/$170 a total of 588 shares. You can only buy 5 contracts because each contract is the equivalent of 100 shares. So, you need to buy 5 contracts, say the $170 March 22 2019 put option costs $3.00 or $300.00 x 5 = $1,500 needed to insure 500 of your AAPL shares. Options is a wasting asset and the value will go down as it approaches its expiration. So, you pay for the put options and AAPL goes up to say $250 by March 22 2019. You now have a paper gain of $250-$170 = $80 x 588 = $47,040 less the $1,500 put option. Assuming you have a residual value on the put option of $100, you can sell the put option and collect that $100. The put option cost you $1,400 but, your stock has gained $47,040. You can keep buying put options to insure your stock position and guarantee you can sell for a fixed price at a fixed period of time. It is called the married put strategy. As long as your stock keeps going up, you can buy put options to protect against the downside. Take note, the cost of the put options come out of your profits if you have any but, it will protect you if say AAPL stock goes down to $110.00 instead, of going up. In that case, you would have been able to sell AAPL for $170 x 500 =$85000 plus $110 x 88 shares= $9680. Total of $94,680 less the $1,500 cost of the put premium. $93,180 would be left of your original $100,000.
You are correct, but just like my shorting a competitor....the nominal gains after the cost of premium (as you stated) negates a lot of the potential benefits. To the OP, Manage your size and be an engineer. IMHO.
Aside from the fact that you're potentially going to cause yourself all kinds of compliance issues with this as was already pointed out, I think you're also really looking at this in entirely the wrong way. Apple is going to give you $100,000 worth of RSUs the date of your hire, hence the formula which ensures you receive exactly that. So to be clear what you're trying to do isn't to hedge, you're just trying to earn money if APPL happens to go up between now an 2/14/19, which is really a completely arbitrary date. Your RSUs have nothing to do with this equation, you're going to get $100,000 worth of RSUs on your hire date no matter if AAPL is selling for $1 or $1,000 on that day. If you want to make a bet that APPL's price will go up between now and then, then buy a call, but don't deceive yourself into thinking you're "hedging" or doing anything different than if I, with no connection to APPL at all, were to buy exactly the same position.
On a practical basis, you would probably, have a hard time doing this for several reasons: 1) Your shares will probably, be restricted and you will not be allowed to sell it unless, it exceeds a certain price. Not the best way to maximize gains. 2) You would probably, need a separate broker account and get authorization to buy both call and put options from your broker. Otherwise, you cannot trade options. 3) Hedging can get costly, especially when you cannot sell your shares to defray the costs. Repeated hedging with put options can become very costly. It only makes sense if you have ready access to your shares and can sell it at any time of your choosing. That way, you can lock in gains to pay for the put options cost and put the gains in your pockets. Find another entry point tor re-enter AAPL on a pullback.
If you own stock options that are DITM and exercisable, vested, you can exercise and hedge, with a no cost collar. If you do not exercise but still want to hedge, during open period when exercising is permissible, the broker who handles your options (we had Morgan Stanley) may work with you, using your vested options as collateral. I personally had not done the second part but a few years ago I talked to Schwab and they said they would if I had an account with them, if company policy allowed, and they managed the company option pools. If the options are DITM but are not exercisable yet, I am not sure because I have never done it. But if you want to purchase a put, or sell short, during time when options are exercisable, I don't see why not unless company policies prohibit you buying and selling company stocks and options.
You should check with AAPL. There are typically three ways companies incentivize employees with stocks: 1. Every year you can purchase some number of company stocks at a discount, typically 10-15% from market that day. 2. Stock options vesting over a few years. 3. Restricted stock grants that are stock awards vesting over a few years. I think your restricted stock units are stock grants and not stock options. With stock grants, you do not have to pay, they awarded it to you at a base price on the grant date ($154). If you sell them at a loss/gain from the base price of $154, you can claim short term/long term loss/gain depending on the holding period. As for hedging see my other post.
You are totally right! The RSU grant event is deterministic regardless of my option purchase (unless I'm buying a gazillion dollars of options). I should therefore hedge it starting from the granted day (e.g., with collar as ajacobson and ironchef suggested), and use LEAPS instead of more short term vehicles since vesting occurs every 6 months. Thank you so much for pointing out the misconception. It's so obvious once you said it.