Stock options, timing, taxes, etc. - Advice?

[Josh]

I know there are some people on here who deal with numbers a lot more than I do, so I figured I'd throw this out there.

 

I have a history of being really unlucky (or stupid) with stock options. I've flipped them and sold them only be to be hit hard with capital gains taxes at the end of the year, I've held on to them in order to try to avoid the taxes only to have the price drop below my strike and not make any money on them whatsoever.

 

I seem to only come out on one side or the other. I'm also not very good at judging the best time to sell based on stock trends and the like.

 

So here I am again this week with a new set of options. They did very well this year, my strike price at around 9.00 and the current value around $25. Because of trends in the tech industry in the past couple weeks, of course, I've watched these shares go from around $29 to the current $25. This is freaking me out and making me want to just sell, take the money, and deal with the short-term capital gains at the end of the year.

 

Is there some formula based on the strike price and the capital gains that can help me make a more informed, less emotional decision about this?

 

Now, I know my company isn't going anywhere, but I also know that this kind of stock can fluctuate wildly. After all, it jumped almost 300% in the past 12 months, and it could easily go the other way in some sort of market correction.

 

Any ideas, experiences, or words of wisdom from those who are able to look at this stuff rationally, and not as a money-hungry toy-buyer who wants a quick five-figure check?

[General Zot]

Man, so much of this depends on personality and your comfort level with risk and taxes. I'm in kind of a similar situation this company, this is basically what I do:

 

Options: Come due on the first of the month, I usually take the money and run. It's either sell them straight out, or exercise and hold until capital gains kicks in. The problem with exercise and hold is that the AMT tax might bite you on the ass and the shares could plummet in the meantime. So even though year end taxes can be painful, I just exercise/sell and put 30-40% of the money aside for potential taxing at year end. The only thing to worry about as far as making "too much money" (???) in a year is that if you exceed $150k (filing jointly married for me) in one year it may affect your ability to contribute to Roth IRAs, 401k, 529 plans, that sort of thing. If you are bumping up on $150k a year though, you are a damn lucky bastard.

 

For stock purchase plans usually you own the stock outright at a 15% discount or something like that. If you don't need the money, might as well let those sit long term and drift in the favorable area of captial gains tax. There is no AMT until you sell the shares and you have a 15% lee-way from the start, so holding these is a good idea vs. holding your options.

 

I've worked in tech my whole adult life and only ever had options worth anything at this last company. Before this they were either underwater, not vested when I left, or in some other way compromised. If you have options that have value, I would treat them as the fat that comes before the inevitable tech lean (or if you prefer being out of work for 6 months during the lull period) and sock the cash away.

 

The best thing to do if you sell though is to earmark that cash for projects/investing before you pull the trigger and then stick to that when the check arrives. Plan to put $5k towards your credit cards and $5 towards your kid's college fund? Then write it down now and make sure that's where the money goes. Don't buy a ferrari in the good times and have to live in the back seat during the bad times Tech is a double edged sword.

[Josh]

For stock purchase plans usually you own the stock outright at a 15% discount or something like that. If you don't need the money, might as well let those sit long term and drift in the favorable area of captial gains tax. There is no AMT until you sell the shares and you have a 15% lee-way from the start, so holding these is a good idea vs. holding your options.

 

That's what these are. So the short-term is treated as income, correct? The long term times out in a year?