Employee Stock Options - Part 2

So now we understand the relationship between our in the money options and alternate investments. The problem, however, is that we have not factored variability (aka risk) into our analysis. Easier said than done.

The first evaluation method is your gut. The key question you have to ask yourself is:
"Is the TERSOR big enough to outweigh the risk of having a significant portion of your wealth tied-up in your company's stock?" The key points are in BOLD.

- outweigh the risk: you have to evaluate risk and variability anytime you are comparing alternate investments. If your company has had big ups and downs in their stock price, you may want to take your money when you can get it.

- significant portion: if the exercise value of your options is insignificant as compared to your overall portfolio, you may be willing to accept more risk with your options.

- your company's stock: would you invest in your company's stock if you didn't work there? Most folks would say no. Your job and your 401k is often dependent on your company's continued success. Do you really need additional exposure to your company's stock?

For my situation (risk adverse, options are over 10% of my net worth & my company's prospects are just 'OK'), I'm going to strongly consider exercising any options with a TERSOR under 3.

Part 3 will look at performing a Monte Carlo simulation in MS Excel.