Comments on: It is Never Too Soon to Take Money Off of the Table http://www.thedividendguyblog.com/it-is-never-too-soon-to-take-money-off-of-the-table/ One Guy's Journey to Passive Income Through Dividend Investing Thu, 09 Sep 2010 12:31:56 +0000 hourly 1 http://wordpress.org/?v=3.0 By: Doug Pedersen http://www.thedividendguyblog.com/it-is-never-too-soon-to-take-money-off-of-the-table/comment-page-1/#comment-784 Doug Pedersen Fri, 19 May 2006 12:34:35 +0000 http://thedividendguyblog.com/?p=80#comment-784 I see your point - if you liquidate early, you have more control over when to sell, whereas if you wait until the expiration period, you may find yourself selling in a tough market. It's obviously better to sell at peak, and with a profit, than be forced to liquidate at an inopportune moment (or simply forfeit the options because they are underwater). Ideally, what you would be able to do is sell the option, rather than exercise it, because you would get the benefit of the in-the-money cash, plus the premium for having a fixed-value option that might still have four YEARS before exercise (this is worth several dollars all by itself). And this is why your friend, in my opinion, has a point. (If the company pays dividends, the value of this premium is considerably smaller, so exercising makes more sense). When you exercise a 10 year or 7 year fixed value option years before it expires, you definately guarantee a profit - you wouldn't be exercising otherwise - and some profit taking is undoubtedly prudent, particularly if a wasting asset represents a huge portion of your net worth. You should protect your downside. The problem is, you also surrender the option premium - the value of the fixed call value for an asset that is likely to increase in price over time, and is therefore likely to trade at a higher value at some point in the future. You tend to maximize the value of your options if you wait until very near the expiration date. Stocks in successful companies tend to rise over time, as retained earnings beget increased capital, which begets higher earnings, which begets more retained earnings, and so it continues. Compounding in the fashion means that stock prices tend to rise. Now, if everyone and his brother in the company are, like you, sitting on 7-year fixed value options, you should think about exercising earlier, because their options and yours are going to be expiring at the same time, and everyone, in a rush to get their money, is going to be minting stock, and driving down prices. But even here, we need to think carefully, because that major selling after a lockup period often tanks the stock right away, and, if the company it truly healthy, it may recover after the initial round of selling. Too bad that fixed value options issues as compensation are non-transferable, so you can't simply sell the option. I see your point – if you liquidate early, you have more control over when to sell, whereas if you wait until the expiration period, you may find yourself selling in a tough market. It’s obviously better to sell at peak, and with a profit, than be forced to liquidate at an inopportune moment (or simply forfeit the options because they are underwater).

Ideally, what you would be able to do is sell the option, rather than exercise it, because you would get the benefit of the in-the-money cash, plus the premium for having a fixed-value option that might still have four YEARS before exercise (this is worth several dollars all by itself). And this is why your friend, in my opinion, has a point. (If the company pays dividends, the value of this premium is considerably smaller, so exercising makes more sense).

When you exercise a 10 year or 7 year fixed value option years before it expires, you definately guarantee a profit – you wouldn’t be exercising otherwise – and some profit taking is undoubtedly prudent, particularly if a wasting asset represents a huge portion of your net worth. You should protect your downside. The problem is, you also surrender the option premium – the value of the fixed call value for an asset that is likely to increase in price over time, and is therefore likely to trade at a higher value at some point in the future. You tend to maximize the value of your options if you wait until very near the expiration date. Stocks in successful companies tend to rise over time, as retained earnings beget increased capital, which begets higher earnings, which begets more retained earnings, and so it continues. Compounding in the fashion means that stock prices tend to rise.

Now, if everyone and his brother in the company are, like you, sitting on 7-year fixed value options, you should think about exercising earlier, because their options and yours are going to be expiring at the same time, and everyone, in a rush to get their money, is going to be minting stock, and driving down prices. But even here, we need to think carefully, because that major selling after a lockup period often tanks the stock right away, and, if the company it truly healthy, it may recover after the initial round of selling.

Too bad that fixed value options issues as compensation are non-transferable, so you can’t simply sell the option.

]]> By: Searchlight Crusade http://www.thedividendguyblog.com/it-is-never-too-soon-to-take-money-off-of-the-table/comment-page-1/#comment-526 Searchlight Crusade Tue, 14 Mar 2006 01:19:25 +0000 http://thedividendguyblog.com/?p=80#comment-526 <strong>Links and Minifeatures 03 13 Monday</strong> Carnivals RINO Sightings Carnival of Personal Finance Links and Minifeatures 03 13 Monday

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]]> By: Carnival of Investing #13 on InvestorGeeks http://www.thedividendguyblog.com/it-is-never-too-soon-to-take-money-off-of-the-table/comment-page-1/#comment-525 Carnival of Investing #13 on InvestorGeeks Mon, 13 Mar 2006 12:05:52 +0000 http://thedividendguyblog.com/?p=80#comment-525 [...] It is Never Too Soon to Take Money Off of the Table [...] [...] It is Never Too Soon to Take Money Off of the Table [...]

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