Quote from piezoe:
I wasn't going to comment, but i think i have to. Good advice for your situation is all over the internet. Go there and not to the ET forum for the correct advice. Let me add that Corporate options issued to employees have different features than the calls and leaps related to equities. Your options will be either of the "Non-qualified kind" (NQSO) or the "Incentive " Kind (ISO). The tax treatment is different for the two. Many tax advisors will advise waiting until just before expiration to exercise. I think that advise is sometimes wrong, but it depends on a number of factors. In my personal opinion, you should exercise NQSO's as soon as the market price equals the exercise price, if you have the money to do so, and then immediately protect against loss with married Puts. After one year, all gain realised after exercise is long term capitol gain and taxed at either 15% or 5%, and at worst you can have only very minimal loss assuming you have properly protected your gains. If you wait until expiration, the spread, which is the difference between the exercise price and the market, and could by then be large, is treated as salary and that means you not only pay regular income tax but also medicare and social security tax. If you wait to expiration to exercise, you also stand to lose out completely on any profits that you would have made had you exercised and protected your profits by hedging, should the stock drop below the exercise price by expiration. The reason some tax professionals recommend waiting to the last minute to exercise is that they believe that the risk of loosing money due to a price decline, plus the loss of income from the funds you used to exercise, outweighs the higher tax you will pay. But they don't understand how profits can be locked in and securred with married puts. They are quite wrong in my opinion. The tax treatment for ISO's is less draconian. You're not taxed on the spread but it is used in computing the Alternative Minimum Tax, so you could potentially get burnt there (make less than about 60K joint, or about 30K single and you're OK). And you can not sell stock from an ISO exercise sooner than 2 years from the option grant date without loosing the benefit of long term cap. gain rate. Again, you should protect your gains with married puts. If you are a short term trader then of course you look at this whole business a little differently. What i am saying here applies to investors, not traders. And don't forget that if you have a very large amount of stock in one company, you should trade some of it out. Don't let another ENRON spoil your retirement. Hope this helps, but please do yourself a favor and go the NET for details.
