Comments on: What To Do With Underwater Stock Options?

By: eric

eric — Wed, 15 Jul 2009 00:04:23 +0000

Sounds complicated but your reasoning makes sense.

By: Jim

Jim — Mon, 13 Jul 2009 13:01:21 +0000

They are pretty worthless, the strike price is almost 75%+ than the current price and she has ~60 days to exercise.

By: Gates VP

Gates VP — Mon, 13 Jul 2009 07:16:32 +0000

Jim, what are the full extent of the clauses on these under-water options?

Are they “slightly” under-water (5%) or really worthless (25%). Do you have exercise rights into the future (typically 6 months after you leave)? If there’s a chance they can recover before they expire then it may be worth keeping cash around.

But otherwise, yeah, they’re generally worthless.

By: undisclosed

undisclosed — Fri, 10 Jul 2009 21:53:35 +0000

Jim – You may also want to review the Plan whether her options are transferable. If it’s not transferable, there’s nothing you can do even though there’s some “fair value”. Good luck!

By: Mark Wolfinger

Mark Wolfinger — Thu, 09 Jul 2009 21:59:47 +0000

freeby50:

If you want to exercise an underwater option, it is your right to do so. They cannot prevent you from taking that action.

But, underwater options are NOT worthless. Are you suggesting that an option to buy shares at 100 is worthless when it has 5 years of lifetime remaining and the stock is 90? That option is currently underwater, yet is quite valuable.

By: freeby50

freeby50 — Thu, 09 Jul 2009 17:00:25 +0000

Underwater options are worthless and should not be exercised. I don’t know if they’d even let you exercise them.

I can’t imagine a situation where you would be required to exercise stock options. I mean they’re called “options” as in you have the “option” to exercise them or not.

By: Jim

Jim — Thu, 09 Jul 2009 16:53:43 +0000

It’s odd how that works sometimes, but they do say that we feel pain/loss more than we enjoy pleasure/gain, maybe that plays a role?

By: Andrew

Andrew — Thu, 09 Jul 2009 16:20:04 +0000

I am often amazed at what people will do to get a tax writeoff. It’s as if not paying taxes is more important to them than having more money. Irrational. When I first came to San Francisco, I did word processing in a law firm that would charge clients $25K to figure out how to screw their employees out of $10K. It was as if not paying their employees was more important than the bottom line.

By: Jim

Jim — Thu, 09 Jul 2009 15:59:10 +0000

Certainly no harm in trying!

By: Mark Wolfinger

Mark Wolfinger — Thu, 09 Jul 2009 15:42:59 +0000

Kosmo:

If the company allows the options to be transferred (i.e., sold), then walking away from them is foolish.

If anyone wants to buy them, sell and take the little cash you can get. If there are no bids (ask co-workers) and you cannot sell, then the options are forfeited. That’s the same as walking away.

By: Jim

Jim — Thu, 09 Jul 2009 15:24:26 +0000

I don’t know but I don’t think she can sell the options and she does forfeit them (she has 60 days to exercise after she quit). Let me check if she can sell them.

By: Kosmo @ The Casual Observer

Kosmo @ The Casual Observer — Thu, 09 Jul 2009 14:55:08 +0000

I think the site may have confused selling stock at a loss with selling underwater options. These are completely different beasts.

With underwater options, you can simply walk away and not incur a loss.

With a stock that has tanked for you, you can’t simply walk away to avoid the loss. Unless the stock rebounds, you WILL have a financial loss at some point. You paid $100 for stock that is now worth $5. At some point, you’re going to take the hit.

Selling the stock in order to get “credit” for the loss on your taxes often makes sense (especially in cases where it’s abundantly clear that the company is toast). After all, you already have a paper loss – why not use it to offset gains on other investments?

Walk away from the options, fast.

I’ll also take people’s money if they want to lose it.

By: Mark Wolfinger

Mark Wolfinger — Thu, 09 Jul 2009 14:10:53 +0000

DO NOT EXERCISE

Too many people don’t understand options (that’s why I wrote the Rookie’s Guide to Options) and those who tell you to exercise just demonstrate that fact.

Out of the money options become worthless at expiration, but as long as time remains they have some value.

Perhaps she can sell them to someone else who works at the company. Determining a fair value is not that difficult. If you send me e-mail – or post info here – with company name (i need to know how volatile the company’s stock is), expiration date and strike price, I can give you a good estimate of value.

Don’t know if she is allowed to sell the options or even if she can keep them in case stock bounces. Does she have to forfeit those options when quitting?

Do not exercise. Please. I think you already get that.

By: Jim

Jim — Thu, 09 Jul 2009 14:01:17 +0000

Why would I voluntarily take a loss just to reduce my tax burden? It’s like paying $1 to save $0.25. If I had $3,000 of gains, I would pay $750 of tax and keep $2,250 of gains. If I took the $3,000 loss from underwater stock options, I would pay $750 and keep $0 of gains. I would rather pay the tax and come out ahead the $2,250.

By: ladam8518

ladam8518 — Thu, 09 Jul 2009 13:41:18 +0000

The only reason to exercise the underwater stock options would be to claim up to a $3,000 loss to offset other taxes. Short and Long term losses offset other capital gains first and then offset regular income (losses are carried over to line 13 of the 2008 Form 1040) up to $3,000.

In the case of your options, don’t exercise them unless required to. Offsetting $3,000 of income would cost $3,000 to save $750 in taxes (assuming 25% bracket).

This offset tactic is usually used only with stocks that have already been purchased and are then sold at a loss to reduce taxes or other gains.