Strategies for Stock Compensation Planning in Volatile Markets

Dear Bruce:

Mr Bantling's article is just another attempt to promote ideas that have been proven to be worth little.

In times of highly volatile markets the value of the "time value" (or as real options traders call it "time premium") increases substantially. This means that the ESOs are worth more because the "time value" part of the ESOs has increased. This means that if you exercise substantially prior to expiration your forfeiture back to the company of the "time value" is substantially greater.

Diversification has been proven to be far less valuable to the owner/exercising ESOs because although there may be somewhat less risk with a diversified portfolio, the expected returns are accordingly less and diversified portfolios require management costs in the form of extra commissions, management fees and a general under performance relative to the market indexes.

The only efficient way to manage un-exercised ESOs is to hedge by selling exchange traded long dated calls and strategically buying puts perhaps in a tax sheltered fund (like an IRA.) The results will on average earn 40 - 80% more after tax.

I can illustrate that proof if someone wants to make a comparison of expected results on a stock that has several years to expiration and average volatility.

Most hedging that takes place is done versus stock not versus un-exercised ESOs. Effectivel there are very little restraints on hedging.

Regards:

John Olagues

504-305-4449

www.optionsforemployees.com/articles

John, Please do not interpret the article

Stockbrokers' Secrets (Part 4): What I Tell My Best Clients About Strategy For Volatile Markets as being critical of the approach explained in your excellent book and articles. The approach in the article on www.myStockOptions.com works well for many people who have clear goals for their stock grants and are satisfied with at least getting some financial gains that satifisy their life goals. I have found through the years with all the volatility and downturns that expectations and planning sometimes gets too sophisticated with fancy models that in the end prove wrong (not just for stock option modeling but for financial and economic modeling, too).

What you recommend is thoughtful and more for sophisticated individuals with substantial holdings. They either need to be very knowledable themselves about the strategies you recommend or work with skilled advisors. At some companies, they need to also allow it.

http://www.optionsforemployees.com/articles/article.php?id=216

John Olagues

504-305-4449