Assumptions:

Suppose you own Employee Stock Options to purchase

2000 shares of ABC company at 20 and also own 1000

shares of previously restricted stock.

The stock trades at 40 and both the options and

restricted stock are vested. The taxes have

been paid on the formerly restricted stock.

Implied Volatility:

You notice that the implied volatilities on the listed

calls have increased substantially in recent weeks

and you want to write calls to take advantage of

the extra premium in the listed calls and reduce

the risk of holding the equity compensation

positions naked.

The value of the Stock is $40,000.

The value of the employee options is about $52,000.

Delta:

The equivalent stock position is +2750

(i.e. +1000 stock plus .87 x 2000).

You decide to sell 20 long term calls with 2 yrs. to

expiration and a 40 exercise price. The market value

of the calls is $1000.00 per hundred shares.

The total proceeds would be $20,000 and the

equivalent stock postion would be +1400 after the

sale of the calls (i.e +2750 - [67 x 20] = +1400) .

The $20,000 can be removed from the account with

no borrowing or interest charges.

Now take the $20,000 and deposit as much as you

can into a Traditional IRA or Roth IRA achieving the

maximum deduction. Make more deposits the

next years into your IRAs using up the $20,000.

Taxes

Have you paid any tax? No, the proceeds of the sale are

not taxed untill you liquidate the positions at a gain or

the options expire out of the money.

Results at Expiration of Listed Calls

Assume that the stock trades at 45 when the two

year calls expire. You would be assigned the

exercise notice and you become short 2000

shares versus the 1000 formerly restricted stock.

Effectively, you will have made a profit of

$10,000 on the 20 calls that were "written".

Your stock is up 5 points adding another $5000

in unliquidated gain and the ESOs are probaly up

3 points adding $6000 in theoretical value.

However, there would be no current tax on those

ESO profits. The tax liability occurs when the short

sale is closed at a profit or the long stock is sold.

If the stock you are short then increases

substantially in value, buy it back and report a

loss and simultaneously do a covered 3/2

ratio "write" or buy some puts inside the IRAs

with part of the $20,000

You will have received tax deductions and reduced

taxes because some of the deposits to the IRA could

be tax deductible.

The interest and profits you earn inside of an IRA

is either tax deferred or not taxed at all (i.e.Roth IRA).

Any Time premium Forfeited?

Have you forfeited any "time premium" by a

premature exercise? No! You captured $20,000

worth of "time premium".

Risk Reduction:

Have you reduced the speculative risk of holding

ESOs? Yes you have. Your delta and theta risks

are reduced.

That's efficient managing of Employee Stock Options.

John Olagues