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Author: rookieJoe Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75381  
Subject: Re: Allocation in a Portfolio Date: 6/10/2004 10:37 AM
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never exercise options and keep the stock.

In many cases, I would not consider exercising and holding, but I disagree that one should never do it.

Here is how I decide…

A big factor is whether the options are NSO or ISO. You should talk to a tax guru to get all the details, but in general, on ISO options, if you hold them a year the entire gain over the strike price is taxable as a capital gain. But on NSO options, the on paper gain the day you exercise is taxed as ordinary income no matter how long you hold it (if you hold a year, and it goes up more, that additional increase is a capital gain). To me, NSO options aren't worth the risk of exercising and holding, but ISO sometimes are.

Another factor is how much of my money is tied up (and at risk) if I hold. The lower the strike price, the greater the potential tax savings relative to the amount of my money at risk.

Another factor is how much company stock you already have. In my case, none of my 401k is in company stock. The only time I own any is during the few days between when ESPP shares are granted and I sell them, or when I am holding exercised options. With how much company stock you already have, I personally would not exercise and hold any of your options until your exposure is drastically reduced.

I have some ISO options at ~20% of the current price, which I have in the past exercised and held for a year.
I have some NSO options at ~40% of the current price, which I will sell immediately when I exercise.
I have some NSO options at ~97% of the current price, which I will sell immediately when I exercise.

Just my $.02.

-Joe
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