Employee Stock Option Diversification - A Different View

I posted a series of articles a few weeks ago that dealt with analyzing Employee Stock Options (Part 1, Part 2, Part 3, Part 4). As my company’s stock has continued to appreciate, I have sold about 30% of my vested options (much to the dismay of my tax preparer - me).

I have written about the desire to diversify my risk by reducing my exposure to my company’s stock. Currently, my options’ exercise value is about 21% of my net worth (excluding my house). Not too bad, but I really don’t want any single investment to be more than 5% of my net worth.

I was trolling through Quicken last night and I had a bit of a revelation: comparing a highly leveraged investment to non-leveraged net worth, may incorrectly minimize your over-concentration risk. What if we valued the ‘in the money’ options as if we held the underlying stock? My 21% would grow to 51%. Yikes!

I think the 51% is the best way to understand how the movement of your company’s stock impacts your overall portfolio. This means that a 10% decline in my company’s stock would reduce the total value of my portfolio by 5%.

I think I’m going to sell some more options today.