hillfronter83 Posted February 14, 2014 Share Posted February 14, 2014 So my wife's employer (big global pharmaceutical) offered to buy substantial stock at 25% discount. The stock will be vested in 5 years or with an event (leaving company, buying a house, etc), which is unlikely. This is like free money but I want to hedge it. I can think of 3 options: short the stock, buy put option or write call option. Any thoughts? Link to comment Share on other sites More sharing options...
watsa_is_a_randian_hero Posted February 14, 2014 Share Posted February 14, 2014 If you hedge and hold for 5 years, after fees and cost to borrow you might be looking at an annualized rate of return of 4%. Doesn't seem like its worth tying up capital to me. Link to comment Share on other sites More sharing options...
thepupil Posted February 14, 2014 Share Posted February 14, 2014 what kind of fees and cost of borrow are involved in shorting a big global pharmaceutical? IB doesn't charge anything for that. I would probably just hedge by buying 25% OTM puts, which you can probably fund with dividends and still keep the upside. I would use it as a way to buy into a big liquid good company with virtually no risk. But I'm not you and you aren't me. Let's take Pfizer for example. Why not buy a boatload of January 2016 25.00 put options for 1.48. You'll receive 1.00/ year in divvies so your downside protection is paid for and get all the upside "for free". Rinse repeat at expiry. Basically I'd encourage you to arbitrage the options market (which is priced off of the market price of the stock) and your wife's wonderful ability to purchase well below market. I think that is a spectacular way to tie up capital. Link to comment Share on other sites More sharing options...
rkbabang Posted February 14, 2014 Share Posted February 14, 2014 That's unfortunate that it is tied up for 5 years, that make the plan much less valuable. The stock purchase plan at my company lets us put aside up to 10% of our pay every pay period and then purchases stock twice per year at a 15% discount to market on that day. We can then sell the stock immediately. The 15% profit is taxable as income, but it is free money. Link to comment Share on other sites More sharing options...
benhacker Posted February 15, 2014 Share Posted February 15, 2014 Be sure to check with your wife's companies HR / legal to insure she hasn't signed a clause saying that she won't short / hedge the stock. I work for a company that has this clause in various forms depending on pay grade... Ben Link to comment Share on other sites More sharing options...
hillfronter83 Posted February 15, 2014 Author Share Posted February 15, 2014 Thanks for all your response! I have done similar things as pupil and Rkba suggested. Since I joined this board, I have seen many innovative thinking that really opened my eyes. So I want to see if there is anything else out there. :) Link to comment Share on other sites More sharing options...
bargainman Posted February 19, 2014 Share Posted February 19, 2014 Be sure to check with your wife's companies HR / legal to insure she hasn't signed a clause saying that she won't short / hedge the stock. I work for a company that has this clause in various forms depending on pay grade... Ben +1. Check legality of options too. Link to comment Share on other sites More sharing options...
bizaro86 Posted February 19, 2014 Share Posted February 19, 2014 Is there a good (free/fast) way of determining what stocks have the highest correlation to a specific company? I have a significant portion of my networth in options of my employer, which I don't want to exercise because they have significant time value. However, I'd like to partially lock in some gains with options hedging, which my employment contract prohibits. I could just buy puts on companies in the same industry and/or the industry ETF, but I'd like to approach it a bit more scientifically. Link to comment Share on other sites More sharing options...
beerbaron Posted February 24, 2014 Share Posted February 24, 2014 Is there a good (free/fast) way of determining what stocks have the highest correlation to a specific company? I have a significant portion of my networth in options of my employer, which I don't want to exercise because they have significant time value. However, I'd like to partially lock in some gains with options hedging, which my employment contract prohibits. I could just buy puts on companies in the same industry and/or the industry ETF, but I'd like to approach it a bit more scientifically. Just download the historical data of the competitors from Yahoo and use the correl() function inexcel you'll have the correlation in seconds. BeerBaron Link to comment Share on other sites More sharing options...
SharperDingaan Posted March 6, 2014 Share Posted March 6, 2014 Most cases you cannot short the stock of your spouse. Firing offence. Know the structure. Is it a 100% vest in Yr 5 - or 20%/yr for 5 Yrs. What happens if they terminate you, or you leave. Know what you are hedging. Whole value of the share, or just the value increase over the intervening period. Most cases you are hedging just the value increase; 100% in Yr 1 , 80% in Yr 2, 60% in Yr 3, etc. Don't over hedge. The DIY hedge is via ATM euro puts on competitors, rolled up & out every 3-6 months, in low volatility periods, at higher strikes. The (exec) hedge is via 3rd party bond-equity swaps. Just keep in mind that when the market drops; your spouse will keep the funny money, but his/her peers will not. When the amounts are large, he/she will be pressured to leave - & branded as not a team player; keep the hedge in a blind trust to minimize the effect on your behaviour. Nobody wants to work with a hero. SD Link to comment Share on other sites More sharing options...
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