How to Sell Calls Against Employee Stock Options
Employee stock options often are included in benefits packages, largely for upper-level employees. Some companies in their infancy may offer stock options to all employees, providing incentive to improve the value of the company, which in turn will increase the value of the stock options. Stock options give the employee the right to buy shares of company stock at a specified price once the stock rises to that price or above. Often, the employee must hold the stock for a specified period of time, but there are ways to make money on the stock options without selling.
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Instructions
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Understand your stock options. Before formulating a plan for the options, it is important to know the type of stock option owned. According to Fidelity Investments, there are two types of stock options, classified by their stock implications. With NSOs, or nonqualified stock options, the employee pays taxes upon exercise, which simply means cashed in. With ISOs, or incentive stock options, the IRS does not tax the options, but there is a waiting period imposed before selling. It is important to understand all tax implications along with company rules before considering the sale of calls against the options.
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Pick a low-cost broker. Anyone, regardless of experience, can start an account with an online investment broker. Research the many online brokers by doing a search for online stock broker reviews. Look for discount brokers who allow the buying and selling of options.
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Set up a margin account to sell naked calls. A naked call is a call option written against shares of stock that the person doesn't own. Since the broker isn't going to trust that the investor owns the employee stock options, the naked call option allows the employee to have the value of his stock options as insurance against any loss.
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Sell the naked call options. Naked call options have the potential for large financial loss, so it's important to stay protected. That means that the expiration date of the naked call option must be after the date when the employee could exercise his options. The strike price of the naked call must also not be lower than the strike price of the employee stock option. If the exercise date is before the employee has access to his company shares, he would have to purchase the underlying shares of stock should the option be exercised. If the strike price of the naked option is lower than the strike price of the employee stock option, the employee will have to pay the difference between the value of the naked call and the value of the employee options. Because of this, the employee often uses long-term options, called LEAPs.
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Repeat the purchase if the options expire. The profit comes from the premium paid to the investor upon writing the option. As this process repeats, the premium becomes a steady stream of income.
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Tips & Warnings
Take time to read about options trading. Consider trading options using smaller amounts of money before risking large amounts of money.
Naked call options are highly risky, and you shouldn't attempt this strategy until you fully understand stock options.
