The optimal time to exercise your options and the right time to exercise your options are often different things. Here was the deciding factor for a director at a F500 company.
Using Options to Realize Your Dreams
The situation:
- Mid 30s couple with two young children
- Approaching mid-six figure income but majority of net worth locked in unexercised company options
- Owns their current home
The dream:
Upgrade to a seven-figure forever home at some vague point in the future, but unsure when or if they could afford to do it.
The strategy:
Shifted timeline from vague future to 18 months by realigning financial focus on making this a reality:
- Accounting for current home equity value
- Creating targeted savings augmentation strategy using higher, after-tax yielding instruments than a typical HYSA
- Exercising a portion of their options
The “objective” answer to the optimal time to exercise options involves lots of academic calculations and hyper-specific, unknowable assumptions.
The practical answer?
Sometimes it’s as simple as looking at whether exercising your options allows you to live the life that you want to live now.
I built a custom model for this client to determine how much we should exercise now vs. how much we should leave on the table to preserve future upside. We then exercised our target portion and locked in nearly six figures of their down payment – putting them solidly, and definitively on track to their dream home by this time next year.
What Other Situations Does it Make Sense to Exercise Options Early?
There many other situations where exercising your options earlier may make more sense than holding them including:
- When you’re switching jobs and the options expire when your employment does
- When you need immediate cashflow for a major life event
- When you feel your net worth may be too concentrated in the position and you want to diversify your risk
Financial tools should serve the life you’re designing, not the other way around. The academic optimal is often the enemy of the intentional.
Originally Shared on LinkedIn. Follow me there to get regular content like this.
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Disclosures: Kangpan & Co. is a registered investment advisor. All content is for educational purposes only and is not financial advice. Past performance is not indicative of future results. This is an actual client case study. Results and recommendations are unique to each client situation.