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Author: dab64 Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 2049  
Subject: Underwater NQSO about to expire Date: 4/20/2007 8:08 PM
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I have a NQSO grant that is about to expire (the original grant was 7 years ago).

The options are actually slightly underwater today (strike price was $30, today's closing price was $29.02). Over the last 52 weeks, the price has ranged between $21.45 and $31.48.

The grant is 2,200 shares, so it would cost me $66,000 to exercise, which is a significant amount of money for us. I am doubtful that the stock price will increase tremendously any time soon, so that's 66K that will be tied up in stock, and unavailable for other things like home improvement, etc.

Should I just let these options expire? The stock price would have to gain $1 for me to just break even. Even if it increased $2 (which doesn't seem likely in the short term), that's only a 3.3% ROI before taxes. It seems more likely that the stock could lose even more value.

Looking at it this way, it seems like very little reward for a significant amount of risk, so I'm inclined to just leave these options on the table. Are there other things I should consider?
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Author: RV2000 Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2039 of 2049
Subject: Re: Underwater NQSO about to expire Date: 4/20/2007 8:26 PM
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The stock price would have to gain $1 for me to just break even.

I am doubtful that the stock price will increase tremendously any time soon, so that's 66K that will be tied up in stock, and unavailable for other things like home improvement, etc.

Are there other things I should consider?


I can't think of anything. You would be better off buying the stock at market price today.....but don't think it's going to go anywhere.....why would you want to consider buying it at a price higher than market?

Could very well be wrong, but this just sounds like options that didn't pan out.

Regards,

rv




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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2040 of 2049
Subject: Re: Underwater NQSO about to expire Date: 4/22/2007 7:54 PM
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If you exercise, you get 2200 shares for $66,000.

If you take that same $66,000 and purchase shares on the open market, you will have 2274 shares.

Therefore, if you really feel the need to spend $66,000 on this stock, you would be better off purchasing the shares on the open market (in other words, this option is worthless). You could also choose to keep the $66,000 in your account for something else (or to purchase these shares at some lower level in the future).


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Author: mathetes Big red star, 1000 posts Old School Fool Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2041 of 2049
Subject: Re: Underwater NQSO about to expire Date: 4/26/2007 4:57 PM
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dab64: I have a NQSO grant that is about to expire (the original grant was 7 years ago).

The options are actually slightly underwater today (strike price was $30, today's closing price was $29.02). Over the last 52 weeks, the price has ranged between $21.45 and $31.48.

The grant is 2,200 shares, so it would cost me $66,000 to exercise, which is a significant amount of money for us. I am doubtful that the stock price will increase tremendously any time soon, so that's 66K that will be tied up in stock, and unavailable for other things like home improvement, etc.

Should I just let these options expire? The stock price would have to gain $1 for me to just break even. Even if it increased $2 (which doesn't seem likely in the short term), that's only a 3.3% ROI before taxes. It seems more likely that the stock could lose even more value.

Looking at it this way, it seems like very little reward for a significant amount of risk, so I'm inclined to just leave these options on the table. Are there other things I should consider?


dab: Based on your question, and assuming you have more in your name from your employer, you should do some research on employer granted options ... I'd recommend www.fairmark.com as a great source of clear information.

You've already gotten the correct answer in this case, but it would be important for you to understand more fully what goes into determining whether or not an option has any value at all.

At a very basic level, a stock option grant from an employer is the equivalent of a Call option that you could purchase on the open market. It's usually granted with a life of, say, ten years --- the expiration date falls 10 years after the grant -- and the strike price is the market price on the day that the grant is extended. The idea (from the company's point of view) is that you and all the other employees will work really hard to make sure it's worth a LOT more before it expires ... i.e., it's granted for the purpose of giving an incentive to the recipients.

From a market pricing point of view, options have both "intrinsic value" and "time value." The intrinsic value is there if the strike price is above the current market price. In your case, as you describe it today, the intrinsic value is $0.00. (I suppose you could say it's negative, but that's only if you actually exercised it, which would be foolish, as already pointed out in other messages). "Time value" is interesting, because -- all other things being equal -- it is greater the longer the time is to expiration. (And it tends to be influenced, technically, by the beta or volatility of the stock. So, for example, the grant you have may have had a time value back a few years ago, of $10, even if its market price was still below the strike price, because there would be some expectation that that market price could still rise above the strike price ... the possibility existed (to a greater or lesser extent based on the stock's volatility. But as time passes, as the expiration date approaches, that time value decreases to zero and whatever value remains is only intrinsic value .... and in your case that is now zero too.

Anyway, on the assumption that you may have other stocks, may also at some point be granted ISOs instead of NQOs, I highly recommend you do some reading and educate yourself. This whole field is fraught with landmines, Alternative Minimum Tax among them (with ISOs), and to navigate it successfully, you need to understand what they're all about.

mathetes



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