SMART INVESTOR: How To Know When You're Finally 'In The Money'

Given the recent stock market rebound, it’s likely many investors are wondering whether they should sit on their stock options or finally exercise them. 

There’s a simple way to find out. 

“The time depends on the option’s price and the owner’s accumulated wealth,” write wealth managers Kathleen M. Fisher and Richard L.N. Weave in a post on the Alliance Bernstein Blog

Here’s their strategy:  

An option’s price consists of two components: its intrinsic value and its time value. The intrinsic value of an in-the-money option is simply the difference between its exercise price and the current stock price. For example, an employee option with an exercise price of $10 on a stock selling for $12 has an intrinsic value of $2. Time value is more complex and can be calculated using various financial models.  But fundamentally, it captures the probability that the option’s intrinsic value will increase before expiration…

In working with clients seeking to actively manage their employee options, we rank the awards in order of lowest to highest ratio of time value to total value. And while there are many factors to assess in each client’s situation, we often recommend considering exercising options whose ratios are below 30% and holding the rest for further appreciation potential.

For more, see their full post at the Alliance Bernstein Blog > 

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