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Book Review: Getting Started in Employee Stock Options

John Olagues and John Summa put together an interesting book.  It's an important read if you own, or know people who own, employee stock options (ESOs).

Getting Started in Employee Stock Options explains that most recipients of ESOs  exercise far earlier than the option expiration date – to lock in profits.  As option traders, all of you know that this is discarding many dollars worth of time value.


Olagues


The two Johns provide much guidance is hedging (reducing the risk of owning) ESOs.  If you can avoid exercising prematurely, there's a high probability that you will come out earning extra dollars by the time you do exercise the options.  If you have been exercising, or plan to exercise some of your ESOs in the foreseeable future, read this book. It's worth your time.

If you have friends or family members who earn ESOs and if they don't understand options very well (or at all), get this book as a gift.  They may not need your help, but if necessary, you can guide them through the basic option concepts. 

The book offers a detailed explanation of how people can hedge their options by using exchange-traded options in the same underlying stock.  Tactics include selling calls and/or buying puts, and the authors recommend trading LEAPS (longer-term options)

Why bother with hedging?  It's an intelligent way to maximize gains from those ESOs.  It makes no sense to throw away thousands of dollars in time premium when there are suitable alternatives.

Unfortunately, if your options were issued by a small company that does not have its options traded on an exchange, then simple direct hedging is not available.

Concerned about tax consequences of your hedging trades?  This book has the answers.

Want to know why companies love it when you exercise early?  There's a thorough discussion. HINT: Early exercise forfeits remaining time premium, and that's a gift to the company.

If there's something you want to know abut ESOs, this book has it.  The authors are not shy, offering their opinions on topics of significance.  The bottom line is that this book is not for everyone, but if you are among those who receive part of your compensation in the form of employee stock options, don't miss this book.  

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