Underwater Options
In response to last week’s post, I received a lot of observations and questions, particularly about underwater stock options. It’s a challenging time in the markets and owning complicated assets like options doesn’t make it any easier. What to do with underwater stock options?
Comments And Concerns
Some readers shared their thoughts:
“All I know about my equity comp is that it goes down and I used to have a boatload of it and now I don’t.”
“I don’t understand it.”
“Not gonna lie, I don’t even know how to get to the website to see how much I own.”
“I’m so underwater on my options, it makes me sick.”
“I have options, I have no idea if they are ISOs or NSOs, how do I find out?”
“The systems are a pain in the neck, and I never learned how to log in to find out how many options I own.”
Where To Get Answers
The most reliable way to find the information about your options is in the option agreement. If you don’t have a copy, contact your human resources department. In the agreement, you will find out what kind of options you own (ISOs or NSOs), the website where you can log in and get the latest up-to-date information on the options’ value, and the options expiration date.
The expiration date is usually ten years after the date of grant. This will help you determine how long you have to make a decision about your options.
At the moment, if your options are unproductive, they can be in the future.
Illustration of Underwater Stock Options
For example, let’s assume your options were granted in 2019, and they have a ten year life (they expire in 2029). The stock is as volatile as the S&P 500, and the exercise price of the option is $100. Recently, the shares have traded down to $70, so they are underwater. What do you think the options are worth? You might be surprised to learn that they are worth $199,677!
Impossible! How are they worth that much!? Assuming that the shares return an average of 8% over the next 7 years, the shares will be worth $119.97. Remember the exercise price of the option is $100, and $19.97 times 10,000 shares is $199,677.
Option holders have a tendency to discount the value of their underwater stock options. In this case, the option has seven years until it expires and it can have a surprisingly high value even though the market price of the stock seems stuck below the exercise price.
If you are done trying to manage your options and your emotions around them, scary times like these can be a great time to start working with a financial planner. Reach out and send me an email, or schedule a free consultation.