When is the right time to sell an option to minimize risk and maximize return?
Posted on 2011-03-22
I thought perhaps the math/science experts would have an engineered opinion.
I have an application where I can put in how many stock options were awarded to an employee (let's say 1000) at a given price (let's say $50/share). The employee can sell the option at any time (assuming the going price during the time of sell is greater than the granted price).
Let's also assume the employee will pay 30% in income taxes as a result of the sale, and (because the company is so great) he/she invests the proceeds in the same company's stock.
Is there an event horizon or graph that can be displayed as a function of this, to show the employee the tradeoffs of hanging on versus selling the options? what's the ideal price to sell at (where the % gain/loss on the stock option versus the actual stock purchased is minimized) - or where the yield from selling the options is such that there's low regret if the stock gets higher in value?
I hope I've articulated this well enough. Guy gets options, is watching the market, when does he start to become indifferent, such that he cashes out to minimize downside risk - as the options have an expiry date, but he's bullish in the longer term for the company stock altogether.