Employee Stock Purchase Plan ESPP

[longlake95]

A friend works for a Canadian publicly traded company that offers a 20% ESPP with an equal employer match. Many do the max 20% and 20% because they feel if they dont, they are leaving $$$ on the table. The problem, amoung several - like the taxes that have to paid on issue of the stock, is that some participants end up with significant holdings as they wait for the stock to “go up”. The shares must be held for a year before selling. So many have at least 1 year worth of stock they cant touch, and maybe a couple more years they can sell/transfer etc... The company in question doesn’t have a good track record of building value. Sideways stock. I’ve suggested that participants could sell covered calls 20-30% out of the money, which is close to what I think the fair value of the company is, and generate some income while they wait for the price to “go up”. If the price rises and the stock is called away close to fair value, they reduce their exposure, which is the main goal. If the stock falls in premium income offsets the stock price loss....a little...

 

Not being an options expert....do you think an options collar (buying puts and writing a call) would be a better strategy? Remember, these participants are not trying to shoot the lights out, just participate in a little upside if there is any, but not lose big either.

 

This ESPP plan creates a odd dynamic, with participants being T4 “rich” and cashflow poor.

 

 

 

 

 

[Jurgis]

Not sure about Canadian companies in general and your specific company in particular, but employees may not be allowed to buy puts (and sell calls?) legally. Whether anyone would check/catch them is another question though.

 

OT: I think in US employees are (theoretically? legally?) not allowed to invest into competitors either. Which would remove a huge chunk of investable space for some tech company employees...

[longlake95]

The custodial account that the ESPP shares are held, doesnt allow options, however once the stock is released after one year, employees can transfer the shares to any personal account and buy options.

 

[Jurgis]

The custodial account that the ESPP shares are held, doesnt allow options, however once the stock is released after one year, employees can transfer the shares to any personal account and buy options.

 

Why wouldn't they just sell the stock after it's released? Especially if they have another year of locked stock coming and "The company in question doesn’t have a good track record of building value. Sideways stock."

 

Personally, having worked for a similar "company in question doesn’t have a good track record of building value. Sideways stock." with ESPP, I've always dumped the stock asap (in my case there was zero lockup). Yeah, you pay taxes, etc, but it's a guaranteed X% return (where X% is the discount). Holding would not have accomplished anything.

 

If you are talking about holding and/or options after lockup, then this really becomes an investment discussion about the company you are talking about... And likely based on your description the answer is really "sell".

[bizaro86]

I had a 5% match on up to 5% of my salary. I had no hold period, so I sold every couple of months to minimize both commissions and risk. I wasn't allowed to sell calls or buy puts (company policy that I signed off on every year).

 

If I was in this situation I would sell the entire position as soon and as often as possible. While that would leave a 40% of salary exposure to something that isn't a great investment, it also means that the stock has to drop by 50% a year to offset the match. I like that risk-reward.

[clutch]

The custodial account that the ESPP shares are held, doesnt allow options, however once the stock is released after one year, employees can transfer the shares to any personal account and buy options.

 

Make sure your friend double check the company policy...