Don't know what constructive sale rule is but his non qualified stock options will always be taxed as ordinary income, so the issue of capital gain does not apply.
I modeled some approximation out and I see only $1-2 of time value. If you are to hedge, you probably should just short the stock. If you are going to short the stock, you should only do so if it makes sense from a tax perspective. My suggestion is to exercise and sell some portion of it. It's the prudent thing to do. You won the corporate lottery - your company's stock has appreciated 10x in 5 years.
I cannot write covered calls as I don't own the stocks, just the options. I checked with ETrade. I don't have that much liquid cash to write naked calls.
Would be great if you can eloborate on how it would change. Any of what you say might help me in having a better discussion with my tax accountant. He is good but not sure will cover all the bases if I don't ask the right questions. And @ironchef was very accurate when he said that it is taxed immediately when I exercise or exercise&sell it immediately. So, so far, I have been exercising and selling it immediately. @TrustyJules ,not sure if this changes your suggestion.
It did, thank you. It did give me an option to consider certain options )) which I otherwise won't have. But, I have to confess that I did not always manage it well. But, even with the better knowledge I have, I am still not sure if I am doing the right things and hence I am here. On your note, I doubt if I want to short it, though I will revisit all ideas again. Exercising and selling some portion may not help with liquidity as I have to pay the taxes the moment I exercise them. It is better to leave it till I am ready to exercise and selling on the same day. Basically, since they are non-qualified stock options, I pay taxes the moment I exercise them, whether I sell on the same day or keep the stocks.
It makes no sense to exercise before you want to sell. Your two practical options are to hold the options or to exercise and sell. You can collar it but that’s only practical if you have many millions worth of stock and a private bank will fund you.
After reading more about collar and calling my broker, the following seems to be my best option: Exercise&Sell enough options to Exercise&hold shares in the multiple of hundreds. And then write coveredCall and buy protective puts (which is what I understand collar is).
Any thoughts? Good, bad? Any right strike price idea for the call and put side or What do I need to read/listen to come up with that price. Good thing is that my position size and timing is pretty much decided.
Well, what changes are the tax implications...the strategy is still sound (and considerably less complicated without the tax implications). But shorting a call is not a covered call in your case, not a naked call. It will create an American credit spread. If you don't have level 3 options with etrade, get it, because shorting is the only way to reverse risk here cheaply and without realizing the taxable gain. You might even be able to do this with a broker assisted trade of you call them (also, it might be worth it to call them...they have good customer service and probably deal with this issue frequently). If you want a small risk position, you could short the 350 call and buy the 300 put (or go further out on strikes depending on your risk tolerance). For 0 risk, do the same but with 315 strikes on both...you'd take a small credit in the latter case (plenty to pay for a vacation) This will create a debit spread and long put, which is a zero margin position and reverse the risk to a level you're comfortable with. And one final thought, you'll get good options knowledge here, but this forum isn't an ideal venue to ask tax and long term investing questions. I'd search the likes of motley fool for an off-the-shelf answer on this that will be more directed towards the tax implications. This is not an uncommon situation, and there's a lot of sources for reputable tax and investing advice. If you can't find an article, email the question to somewhere like that...some talking head would love a pretext to answer this question.