advice wanted on share options

shortlegs

A few years back I was offered 1,000 share options by my current employers These options expire at the end of this year. I wonder if anyone can advise on tax implications,etc.
Many thanks.

RainyDay

I presume you mean that you were actually granted stock options - right? An 'offer' means nothing. A grant means that you can now exercise these options. Are you sure they expire this year? 3 years expiry would be fairly unusual (though not impossible). Are you mixing up 'expiring' with 'vesting', where vesting is the date after which you can actually cash in the option by exercising it.

Options are only of value if the stock price has risen between the date the option was granted and the date you exercise the option. In your case, the benefit due to you will be 1,000 x price increase over those 2 dates.

If you are a higher-rate tax payer, your tax liability will be 42% of this gain and will be due to Revenue within 30 days of the date of exercise. Get form RTS01 from the Revenue website.


If they do expire this year, make sure you exercise before the expiry date or you lose everything.

See key post on stock options from Askaboutmoney.com for more details.

PDelux

I think as well that you may not be able to trade in certain periods, "blackout periods".

Options are only of value if the stock price has risen between the date the option was granted and the date you exercise the option

I was wondering about this recently. If the company pays a good dividend would it be useful to do a cash exercise and receive the income from the dividends? Then sell when the share price rises. Do many people do this? (Do a cash exercise on the options or some of, in order to get dividends)

dunkamania

PDelux wrote:

I was wondering about this recently. If the company pays a good dividend would it be useful to do a cash exercise and receive the income from the dividends? Then sell when the share price rises. Do many people do this? (Do a cash exercise on the options or some of, in order to get dividends)

If your options are in the money then a dividend payment will decrease the value of your options,in the same way the stock will decrease,except you dont receive any cash,unlike the stock.

If the dividend divided by the strike price(as a %)is greater than the interest your bank is paying you then it might make sense to exercise the stock before the dividend record date.

There is no guarrantee the share will rise in price after the dividend though.

shoegirl

It would only be worth purchasing vested stock options if the current share price is higher than your strike price.

For example a previous employer granted me 100 options at $37 and 200 options at $42. The share price fell to about $17 some time after. This made the options worthless (known as being "underwater").

On the other hand, if the share price had risen to say, $60, then I would have had the option to buy shares worth $60 for the lower price. I could then purchase the stock for about 12k, but immediately resell on for 18k, making a profit of 6k in the process. You'd be liable to CGT at 20% on the gain, so it would net you nearly 5k.

The alternative is that you can also use the profits in some of the stock to fund or part fund the purchase, which effectively gives you discounted stocks.

Again its only worthwhile if the shares are of higher value than your strike price.

Hitchhiker's Guide to...

as an economic rule (Black-Scholes option pricing formula):

1. dividends lower the value of "call" option (option giving you the right to buy shares)
2. high share price movements (volatility) increase the value of a call option
3. high interest rates increase the value of a call option
4. "time to maturity" i.e. the time until you have to exercise the option and turn it into shares, increases the value of a call option

PDelux

You'd be liable to CGT at 20% on the gain

I thought there was a different tax rate for options, that they are treated as income 42% rather than CGT?

My personal situation is i have ESPP shares which i receive dividends from. i could sell and make a profit but i dont need the money at the moment(and the market has fallen recently). So i will hang on to these.

I also have options and my thinking was i could use some spare money to do a "cash exercise" on some of the options and therefore increase the number of shares i have and get more dividends. This is new to me though so i am looking into the idea first.

thanks for the posts by the way.
But i dont understand the point about dividends lowering the price, unless you're talking about the current share price being lower than purchase price?

dunkamania

An options intrinsic value is the current price minus the strike price at which the option was issued,when a stock pays a dividend,the share price is lowered by the amount of the dividend,which decreases the value of the option.

If your strike is 15 and the stock which was trading at 20 pays a dividend of 1 then the stock value drops to 19,and intrinsic value of option goes from 5 to 4.

jhegarty

they are taxed at your paye rate on the profit at time of exercise..... becuase they are really a type of pay from your employer..