Options strategy for employee stock plan

For real?  The shares are vested immediately? So are you saying that no matter what you will make 15% minimum of your investment every six months (meaning if the current price was also the low and buying and selling at market immediately)?  I have to be missing something here...  Is there a limit to the # of shares you can buy?

On paper it is a wonderful deal, but remember your salary and this investment are coming from the same place. If for some reason the companies fortunes should fail, you could be out of a job and with a big investment loss. Because of this, most people are reluctant to put a huge proportion of their investments in the same company they work for. However, if you like the company, and believe in their prospects, I would do some. Remember 10% of your salary means a lot more to you if you make $50,000, than if you make $500,000.    

Wow that is lucrative.  I hope you are doing 10% of your salary everytime then. 

My suggestion would be to sell just atm monthly covered calls.  This way if the stock price stays the same the value of the option will drop and you can buy it back for less and do the same the next month.  They tend to drop in value pretty fast in the month of expiration.  If it goes higher then you let your shares get taken and still bag the premium and the gains inherent from the program. The atm covered call should protect you pretty well from slides in the price, although won't prevent losses on a complete stock price nose dive.

The idea here is that is that you try to lock in your already inherent profits, while most likely making interest on top or at least protecting most of your profits.  It's extremely rare to get something that gives you an automatic minimum of 15% on your money every six months.  The last thing you want to do is lose those gains.

 Although I do not consider myself an expert on options and others may have better ideas.  I'm curious what company you work for, but understand if you would rather not disclose.

Also if you are worried about it being a large part or investing where you work, then do the max of the program and sell immediately for instant min of 15% of 10% of your salary every six months.  I personally do not like having all eggs in one basket myself, and so I do not invest in the company I work for.

Edit: also might consider deep itm covered calls, depending on the premiums and what you want to do.  As it will likely help you divest while making the premium. So you can put that money elsewhere.

I think you are overthinking this one. If I was contemplating an investment, that I though had a good chance of ending the next six months at the low, I think I would pass, or at least wait on it to see what the future would bring. But above that you are getting a 15% discount to the low price, so if you think that there is really a likelihood of falling below that price, why invest? On top of that you will be paying a premium for insuring that you get out at the six month low price, which only limits your gain if the stock doesn’t turn out to be a loser. Forget about the favorable pricing. Would you buy it in the present market at the present price? 

ico - it might be a good idea to talk with the administrator of your 401 plan and verify you can trade options in your account

Hello ico,

This is a terrific deal, but as has been mentioned, you may not want to place so much of your assets into the stock of the company that provides so much already (job!!). Thus finding a risk-reducing idea that may occasionally result in selling some of those shares is a good compromise.

Buying puts is expensive. It will decrease your profits (if any) by a significant amount.

I suggest a less aggressive strategy – one that enhances returns. Every time you accumulate 100 shares, write one covered call option. This way you collect the premium, instead of paying for it. The downside protection is less, but – as I said you may find that puts are just too costly.

Which call to write (sell)? If you are aggressively bullish then choose an out of the money (OTM) option. To reduce commissions, choose something with a 3-12 month lifetime. One caution: Make sure that the cash collected is worth your while. If the premium is only a few dimes, you can find a better option to sell.

Sell ATM when you want to collect the maximum amount of time value and when you are ambivalent about owning the shares for a long time.

If you truly want to take potential profits, consider selling options that are ITM by a small amount. These provide good downside protection, allow you to exit with your built-in profit, and to possibly add to that profit by the amount of the option’s time premium.

One note: You will not be allowed to sell ‘naked’ call options, so the shares will have to be transferred to your brokerage account before you can write these calls.

Whatever you decide to do, this is a very nice employee benefit. Use it wisely.

Mark D Wolfinger
Options for Rookies
June 12, 2012

Options involve risks and are not suitable for all investors. Prior to buying or selling options, an investor must receive a copy of Characteristics and Risks of Standardized Options, sent to you in previous communication. Additional copies may be obtained by calling TRADEKING at 877-495-KING or by visiting www.TradeKing.com/ODD.

System response and access times may vary due to market conditions, system performance, and other factors.

Market timing is a complex investment strategy which involves risk and may incur additional commission costs.

The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that these forecasts will be correct.

Multiple leg options strategies involve additional risks and multiple commissions, and may result in complex tax treatments. Please consult a tax advisor.

TradeKing Webinars and All-Star Blogs are provided for educational and informational purposes only. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. TradeKing provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. You alone are responsible for evaluating the merits and risks associated with the use of TradeKing's systems, services or products.

TradeKing selects and defines as All-Stars certain independent market commentators who are recognized industry personalities and experienced traders. TradeKing All-Stars provide timely market commentary via the TradeKing All-Star blog at http://community.tradeking.com/members/tk-all-star/blogs. Each All-Star commentator's bio, related qualifications and disclosure as to their relationship with TradeKing can be found on the All-Star blog roster, available at http://community.tradeking.com/members/tk-all-star/details. The selection of All-Stars commentators is solely based on the quality and style of the content provided. TradeKing does not measure, endorse, or monitor the performance or correctness of any statement or recommendation made by independent All-Stars commentators on TradeKing.com. Supporting documentation for any claims made in this post will be supplied upon request by the author of the post, Mark Wolfinger, who is solely responsible for the views expressed here. Send a private message to All-Stars using the link below the profile image.

All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. TradeKing provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. You alone are responsible for evaluating the merits and risks associated with the use of TradeKing's systems, services or products.

Where I used to work (AMD) we had an employee stock purchase plan (ESPP) that was similar.  Our plan made quarterly purchases at 85% the closing price at the start of the quarter or at the end of the quarter, whichever was lower.

Aside from diversification risk of investing in the same company where you work, there are a few other things that you may wish to consider:

1) We could not invest more than $25k annually in the ESPP.  This $25k limit was calculated more conservatively--it may have been based on the higher of the closing prices at the start or end of the offering period.  I don't recall the details, but it always ended up that the actual limit was reached before $25k was actually invested in the calendar year.  We were told this was an IRS rule.

2) Gains from ESPP stock sold was taxed as ordinary income unless the stock was held for longer than 2 years.

3) AMD's policy forbade employees from selling short or trading options on the company stock.