Protecting unvested AMZN stock gains
- Thread starter andywatts
- Start date
Robert Morse
Sponsor
andywatts,
If you sell calls, you will require the margin for the naked options. You can't use restricted stock to offset margin. If you buy a put, that will require the full value of the put option in your account.
Bob
If you sell calls, you will require the margin for the naked options. You can't use restricted stock to offset margin. If you buy a put, that will require the full value of the put option in your account.
Bob
L
lovethetrade
Buy put options.
You only get the premium when you sell(write) options so not really an effective hedge for your restricted AMZN stock and there's unlimited downside risk when you write options. Not for the beginner options trader.
When you buy options your risk is limited to the cost of the premium which makes it a cheap way of hedging (insuring) against loss in the underlying.
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buy puts and sell calls. called a collar or synthetic short
If you sell calls and get exercised, there may be income tax consequences regarding "recognition of gain from restricted stock". I could be all wrong... been a long time since I was in the field on this kind of thing... still worth looking into I think, as you wouldn't want a nasty tax surprise.
Perhaps somebody with current knowledge will chime in...
Do a no cost LEAP collar that expires in the same time frame as your restricted stocks vesting period. Your broker may allow you to use the stock options as collateral so it is no cost and no margin requirement to you. The trick is setting the collar width. You could set the width with some slack so you could still participate in more ups but suffer some potent small down side.
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Not a lawyer but I do not recall seeing such a clause but good advice to consult company lawyer.
We could give you better advice if you told us what price you will get to buy the stock and when in 2018.
Essentially you are getting a "free call" on Amazon. Lets say your option they have given you lets you buy 100 shares of the stock at 900 and vests in June of 2018. If you simply sold the June 2018 call, now trading about 162, you would lock in $16,200. You would have no other upside opportunity or downside risk.
If you bought a put, say the June 1000 (currently trading about 92) you would "lock in" only $800, but you would have upside and downside opportunity if Amazon is bellow 900 or above 1000 when your option vest. Depending what strike put you buy changes what you lock in or your opportunity.
If you buy a put and sell a call of the same strike, you will essentially "sell" Amazon at its current price. Here you have a nice opportunity if the price falls below your vesting price, but you will have no more upside. For this strategy you would sell the June 1000 call and buy the June 1000 put.
As mentioned by 2rosy, you could do a collar. here you would by a put and sell a call of a different strike to fund the put purchase. So for example you could buy the June 1000 put and sell the June 1100 call. So pay 92 for the put and sell the call for 65. Here you would pay $2700 net. You lock in $7,300 (again based on a 900 vesting price) but give up any upside above 1100. But you also have downside opportunity if the stock falls a lot.
As mentioned earlier if you are selling naked calls the margin will be high and you will have to put up all the money for any puts bought. If you open a portfolio margin account, your margin will be much less.
Also as others have mentioned make sure you are allowed to hedge in this way.
Essentially you are getting a "free call" on Amazon. Lets say your option they have given you lets you buy 100 shares of the stock at 900 and vests in June of 2018. If you simply sold the June 2018 call, now trading about 162, you would lock in $16,200. You would have no other upside opportunity or downside risk.
If you bought a put, say the June 1000 (currently trading about 92) you would "lock in" only $800, but you would have upside and downside opportunity if Amazon is bellow 900 or above 1000 when your option vest. Depending what strike put you buy changes what you lock in or your opportunity.
If you buy a put and sell a call of the same strike, you will essentially "sell" Amazon at its current price. Here you have a nice opportunity if the price falls below your vesting price, but you will have no more upside. For this strategy you would sell the June 1000 call and buy the June 1000 put.
As mentioned by 2rosy, you could do a collar. here you would by a put and sell a call of a different strike to fund the put purchase. So for example you could buy the June 1000 put and sell the June 1100 call. So pay 92 for the put and sell the call for 65. Here you would pay $2700 net. You lock in $7,300 (again based on a 900 vesting price) but give up any upside above 1100. But you also have downside opportunity if the stock falls a lot.
As mentioned earlier if you are selling naked calls the margin will be high and you will have to put up all the money for any puts bought. If you open a portfolio margin account, your margin will be much less.
Also as others have mentioned make sure you are allowed to hedge in this way.