Tip of the Week: Good Exercise (1/10/00)

\| Home \| Site Search \| Previous Tips \|
	Good Exercise Financial Tip of the Week by Deloitte & Touche OnLine January 10, 2000

There's a time to hold options, and a time to convert them to stock.

See our archive of previous tips on your money, your taxes and your financial plan.

Because they are investments, how and when to convert options to stock and whether or not to hold on to that stock depends largely on the individual's risk tolerance and existing portfolio. For example, someone who already owns a significant chunk of his employer's stock might be wise to convert his options into cash and purchase another asset, rather than accumulating more of the same.

A person's risk tolerance and tax bracket will also influence when she exercises her options. While conventional wisdom holds that employees should wait until the stock price has significantly appreciated before converting their options, Charles Brighton, a senior manager in the Seattle office of Deloitte & Touche's Financial Counseling Services said, that doesn't always apply.

Consider an employee working for a hot technology company, he said. If she thinks her company's stock is headed due north, as long as the strike price on her nonqualified options is lower than the market price of the stock, she might want to consider a more aggressive strategy in which she executes sooner rather than later. If she does, she'll pay ordinary income tax on a small gain today and capital gains on the bulk of her investment profit when she sells her stock down the road. If she waits until the last minute to execute her options she'll pay ordinary income taxes on a much larger chunk of her investment.

"Your thoughts on what the stock is going do is the most important variable," he said. "You should never let the tax consequences drive your investment decision. Nevertheless you should know what they are. There is definitely a breakeven point to this strategy."