Reduce Your Concentrated Company Stock Position and Build Wealth
An increasingly popular way companies are compensating their employees to retain top talent is through equity compensation like Restricted Stock Units (RSUs) or Stock Options. Although we do not necessarily recommend allowing your equity-based compensation to consume the majority or a significant portion of your wealth, we understand it happens… a lot actually. If you’ve taken the time to speak to a financial planner or advisor about it, most of the time the common response is to trim your position and start diversifying. While it is not necessarily bad advice, it also lacks creativity. One way to slowly exit your concentrated company stock position, and get paid while doing it, is through a covered call strategy.
Reducing Your Concentrated Company Stock Position Through a Covered Call
One way you can work to reduce your company stock concentration in a position is through writing covered calls on the position. If you are new to options, feel free to check out our article providing a high-level overview of options. For our example, we are going to look at Jose’s portfolio. Jose works at Meta, the parent company of Facebook. Jose has worked there for years and has accumulated quite a bit in company stock, to the tune of 1000 shares. Highlighted in pink is the price of Meta as of market close 8/15/2022. This date will be our reference point for our quotes today:
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- Jose decides that he wants to trim some of his position but doesn’t necessarily want to sell at today’s price of $180.76. He believes the stock will go up a little more.
- Jose decides that he will sell calls on META in order to set a predetermined exit price of $200 a share and to get paid
- Highlighted in yellow is the option. The option expires on 11/18/2022 and 1 contract is worth $9.50 a share or $950 (Whenever you sell a security you always look at the “Bid” side of the order and for a purchase, you look at the “Ask” side)
- Jose has 1000 shares so he decides to sell 10 contracts. 10 contracts at $9.50 equates to $9,500 in income
- The total value of the position in META is $180,760. $9,500/$180,760 = 0.0525 x 100 = 5.25%. That is 5.25% of downside protection for the next 95 days or a theoretical annualized yield of roughly 20% (365 days/95 = 3.84 -> 3.84 x 9500 = $36,480 -> $36,480/$180,760 = .2018 -> .2018 x 100 = 20.18%)
Between now and 11/18/2022 if META does not go above $200 a share, Jose walks away with $9,500 in income and he still keeps all of his META stock. If between now and 11/18/2022 META goes up above $200, the entity on the other side can force Jose to hand over all or a portion of his Meta stock at $200 a share. At expiration on 11/18/2022, if the stock is above $200, Jose will hand over all shares at $200 a share. Either way, Jose in this example is happy with the result. The reason being is that Jose wanted to sell Facebook anyway. If he got out at $200 a share, he is a happy camper. If he doesn’t get out, he pockets $9500 in income.
Setting Expectations
I cannot stress this enough, when you write/sell calls on a position you own, the mentality going into it should be that you are accepting that you will part ways with the concentrated company stock position at whatever strike price you choose. I have seen it happen far too often, clients and advisors writing/selling calls on positions they own to generate income and forget that their A. upside is capped at the strike or B. Their shares may be called away from them even before expiration if the stock goes above the strike price. Another thing to keep in mind is that the income you receive from the covered calls will all vary depending on the time value left on the contract and current market conditions. At MDRN Wealth one of our specialties is identifying these types of opportunities in the options market and using them to help optimize our client’s financial plans. If you feel like you would benefit from incorporating a covered call strategy as part of your over portfolio and financial plan, feel free to set up some time to chat more with us about your specific situation.
Important Disclosures
The information provided in this article is general information. It is not intended to be construed as investment, tax, or legal advice.
This is not an offer or solicitation to buy, sell, or endorse any company, security, fund, or other investment vehicle.
Investing involves risks including possible loss of principal
Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance. Opinions are subject to change without notice.
