Thursday, January 12, 2006

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.


At 8:32 AM, Anonymous Anonymous said...

I'm a relatively infrequent stock buyer, and I'm wondering what your opinion is on the online services out there (Scottrade, etc). Which would you consider the best value for the money? Thank you.

At 9:11 AM, Blogger Early Riser said...


I've used Ameritrade, TD Waterhouse and E*Trade. My favorite is E*Trade and I recommend them to my friends. I'll do a full review of them this weekend.



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