6 Steps to Take When Volatility Strikes Your Company

If you own company stock and/or employer stock options, it’s very possible that you have experienced market volatility and have seen firsthand how a quick change in the stock price can materially impact the value of your stock options. A rising stock price can quickly change the value of your stock options into an extremely large figure. Potentially a figure so large that it can create a concentrated equity position that should be evaluated.

On the other side, a decrease in stock price can rapidly wipe away wealth quicker than you had ever imagined.  Leaving you wondering “what if.”

Inherent with a single position in any one company stock is the risk of volatility.  Said another way, the risk of significant changes in value.

The key is question that should be considered is how do you deal with company stock options that are constantly rising and falling in value?

Step 1 – Review and Follow the Plan When Volatility Strikes Your Company

Volatility can strike quickly and unexpectedly. General stock market swings or specific public news at your company can cause increased volatility in the value your stock options. As the company stock moves up and down with the stock market or own its own, your stock options are going to be doing all sorts of things. Seeing the value of your stock options change so quickly may make you start second guessing your original plan. You may start considering if you should sell all of your options now.

Rather than focusing so much on short-term price fluctuations of your options, volatile periods are a time to review your long-term plan. And one better, stick to it. Keep in mind that you aren’t in this for just a few days or weeks. Price swings are short-term but your focus is long-term. Allow your plan to play out, or make meaningful and thought out adjustments as necessary

It may help to go back and look at how well your plan has performed so far. It’s possible that you have divested some shares based on your vesting schedule and/ or expiration schedule. Divesting shares is one way to plan so you aren’t overweight in your company’s stock. It also spreads your tax bill across several years rather than one.

A combination of reviewing your past decision making and your short and long-term goal planning is a great way to manage fear and anxiety that arises during times of market volatility.

Step 2 – Don’t Be the Tax Tail When Volatility Hits

It’ not uncommon to continue holding stock options well after the options have vested. Rather than selling some of the shares when they are first available, the easier option is often to continue holding stock options without a plan. In some cases, the decision to hold is a strategy focused on deferring income taxes.  However, focusing too much on deferring taxes may not be the only thing you should consider when making a decision to exercise.

The longer you hold company shares because of some tax reason, the more chance your shares have of losing value due to a drop in their stock price. In fact, paying a tax bill may be a far better decision than holding a stock that decreases in price by 40% or more.

Rather than trying to plan around taxes, it may be prudent to review whether your stock option holding fits into your overall portfolio allocation and long-term financial plan. If you find that it doesn’t and that your portfolio too heavily skewed toward company stock, it might be time to sell some shares and reallocate.

Does the company stock fit your risk tolerance profile? If you have a lower tolerance for risk and the company stock is high risk because of its industry or maybe the fact that the company isn’t yet generating any profits, it’s may be obvious that the company stock isn’t a match for your portfolio. Regardless of the tax hit, it may be time to sell.

Step 3 – Keep Track of Newly Granted Stock Options During Volaility

It’s not uncommon for employees to receive additional stock option grants. Often, these grants are issued at a price equal to the current stock market price.

During periods of volatility when stock price is down, it’s likely the grant price of newly issued stock options will be equal to that of the current market price. A lower stock price means a lower grant price.  All else being equal, this will lead to a greater opportunity for stock option growth as compared to a stock option grant with a higher grant price (should the stock price recover)

If you retain stock options that have time remaining until expiration, are unvested, or you plan to keep, short term downside volatility can be viewed as an opportunity to enhance your holding with options at a lower price.

As the company stock price recovers above your cost basis, you’ll benefit from that increased holding on the newly issued stock options

Step 4 – Be Realistic with The Stock Price

Are you’re holding onto your shares thinking they may be your potential meal ticket to millions and millions of dollars?  If so, you may want to check your expectations. How realistic is it to believe the stock will double in the next few years? Or triple for that matter so you can take a huge pay day?

Having realistic expectations of what the stock will do just might help you avoid a terrible scenario, such as the stock quickly losing 25% or 50% of its value.

One problem is that it is hard determine what is realistic about a stock price. One argument is that the current market price of the stock is equal to its true current value. Anything else is simply speculative.

Other ways to consider what is realistic may be to review and evaluate earnings reports, economic output, and global market trends.  Others find in important to consider their personal opinion of the company stock.

Ultimately is important to ask yourself if you are comfortable speculating about a stock price and jeopardizing a bird in the hand?  Because at the end of the day, you may be right, and you may be wrong