Deciding when to exercise can be tricky

By GENE WALDEN

Last update: June 7, 2008 - 9:31 PM

The recent stock market slump has prompted some corporate employees
with company stock options to rethink their strategy on cashing in
their options. A 10- to 20-percent drop in the price of a stock can
cause a much more drastic drop in the value of stock options. In fact,
in some cases, it can wipe out their value entirely.

"In a bull market, sometimes investors get too greedy and hold on
to their options because they think the stock is going to keep going
up," said Mark Maes, a senior financial adviser with Ameriprise in
Edina. "Then, when it drops, they still don't want to sell because they
think the price will go back up. That happened at ADC
Telecommunications a few years ago. The stock dropped and didn't go
back up and the stock options expired worthless. That cost some people
millions of dollars. The same thing happened at many other high-tech
companies when the tech market crashed."

Maes, who helps employees at Cargill, Best Buy Co. Inc., 3M Co.,
UnitedHealth Group Inc., Ameriprise and other Twin Cities companies
manage employee stock options, said option-holders need a plan and a
strategy for exercising options just as they would for other
investments. "I try to help them lay out a schedule for exercising
their options. We look at their investment goals for the short term and
the long term, as well as their retirement goals and other factors,
such as their risk threshold."

Hundreds of companies offer stock options to their employees as part
of an employee compensation package that is intended to encourage them
to stay with the company and work hard to help drive the growth of the
company.

Typically, when stock options are issued, they have an "exercise"
price or "strike" price that is about the same as the current stock
price. They also have a time frame during which the holders must
exercise or cash in those options.