When should you sell your stock options? Learn about the diminishing leverage your stock options have over time, how intrinsic value correlates to market price, and when to make the decision to sell your stock in this short educational video.
Dan Seder 0:00
A lot of executives are unsure when they should start taking their stock options off the table. Today, I'm going to show you the first signs of when you should start considering exercising your stock options.
Today, I'm going to talk about the diminishing leverage that stock options offer. As you know, stock options are granted at a strike price. As the underlying stock travels above the strike price, the option has a tremendous amount of leverage early on. Over time, the further the stock price moves from that strike price, the amount of leverage dwindles, and here's why.
Let's assume an example where the strike price is $25 per share, and if the underlying stock is trading at $26, we know that the option grant is $1 in the money. Let's say the stock moves from $26 to $27 per share, and that option grant then goes from $1 to $2 in the money. That $1 move in stock price translates into a 100% return in the option grant; so if we continue that example, and go from $27 to $28, again, another $1 move in stock price, the option grant goes from $2 to $3 in the money, and that $1 move only represents a 50% return on the option grant. So, think forward to an example where the stock is now trading at $1,000 per share and moves from $1,000 to $1,001 per share. That same $1 move in stock price represents a much much lower relative return on the option grant.
And so, we found that when the market price exceeds about 180% of the strike price, that's when you should start considering. Now, it's not the only consideration, but it's when you should start considering taking your stock option grants off the table.
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