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Basics: Underwater Options


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Articles   (Jump to FAQs)

Stomach Volatility In Your Company's Stock Without Losing Your Mind 

Joanna Glasner and Bruce Brumberg
Don't be discouraged by stock market volatility and underwater stock options. As the experts note, stock grants are tools for building wealth in the long term.

Manage Your Expectations To Avoid The "Option Blues"  This is premium content

Loren Rodgers
You feel let down by your stock options. Your company's stock price has dropped, leaving you with underwater options, and the cash flow from expected option riches has evaporated.

Stockbrokers' Secrets (Part 4): What I Tell My Best Clients About Down-Market Strategy  This is premium content

W.E.B. Bantling
Market declines rattle even the most experienced option veterans (and advisors too). If you are less than fully prepared to cope with the emotional toll caused by an uncertain market, heed these ten topics.

Option Reprice Wave Builds

Jeff Nash
Financial Week, 2/18/08
Repricing underwater stock options seems a good idea when many executives and employees are stuck with worthless options after a company's stock price falls. However, getting shareholders to approve the repricing is easier said than done. This article explores "shareholder-friendly" ways to present the subject of repricing.

Stock Option Pitfalls And Strategies Du Jour

Paul Sweeney
Journal of Accountancy, 10/01
The use of stock options as the ideal form of employee compensation has lost some of its luster. Companies scramble to remedy their underwater long-term incentive plans. Strategies include repricing, exchanges, and issuing restricted stock.

Why Are Insiders Getting Mulligans?

Lisa Meyer
Red Herring, 4/3/01
Does all this repricing of stock options and rescinding of executive stock purchases remind you of do-overs in gym class? It seems that the only ones living with a company's bad investment decisions are those who aren't pulling a paycheck from the company. (Registration is required.)

Keeping Options Afloat

Andrew Osterland
CFO.com, 3/1/01
To prevent turnover and retain stock options' incentive value, companies are approaching underwater options in a variety of ways.

Dot-Coms Juggle Dot-Gone Options

Scarlett Pruitt
InfoWorld.com, 4/18/01
Companies are increasingly turning to an option reissue program commonly referred to as "six-and-one." Under this type of plan, companies can cancel options and reissue them, no sooner than six months and one day later, according to accounting laws.

Options, Get Your New Options

Joanna Glasner
WIRED News, 4/3/01
Technology companies -- which richly rewarded employees with stock options in 1999 and 2000 -- are now finding themselves in a bind. A huge portion of the options they doled out over the last few years are now underwater, meaning they're worth less than the current trading price of the stock. As a result, companies are under pressure to grant new stock options to keep the employees they're not laying off from jumping ship.

Employees Still Crave Options

Craig Schneider
CFO.com, 11/08/00
Has volatility in internet and technology stocks soured employees on stock options? Surprisingly, no.

Trying To Raise Sunken Stock Options Can Be A Murky Business: Repricing Options When Shares Tank A Questionable Move

Kathleen Pender
San Francisco Chronicle, 4/28/00
Companies get cautious about hyping stock options. Some companies will not hire you if you bring up options too early in the interview process.

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FAQs   (Jump to articles)

What are "underwater" stock options? 

Underwater options have an exercise price greater than the market price of the stock. For example...

I am about to lose my job and must exercise my stock options, but my exercise price is above the market price. Should I exercise them? 

No. You do not want to exercise underwater stock options. You can buy the stock for less in the open market...

UPDATED! What approaches do companies apply to underwater stock options?  This is premium content

According to a study by Steven Hall & Partners, stock options were underwater at 34% of the companies in the Fortune 500 on February 8, 2008. In the past, approaches have included...

I have underwater options. Will I get a tax loss when I exercise them?  This is premium content

No. When your exercise price (e.g., $10) is higher than the...

I have underwater stock options that are about to expire unexercised. Can I write these off as some type of loss on my tax return?  This is premium content

Wishful thinking! Just as you are not taxed on the value of the options at grant, you may not write off any expired unexercised options, whether underwater or in the money...

I have grants of vested in-the-money and underwater options. If I exercise all my options and immediately sell the stock, can I offset the gains in the options with the losses (on the underwater options)?  This is premium content

This is wishful thinking, because these are two separate transactions. It does not make sense to...

Can the exercise price of outstanding stock options ever be raised or lowered? Can the options be repriced?  This is premium content

Generally, the exercise price cannot be raised without your written consent...

What is an option exchange?  This is premium content

An option exchange is an alternative to repricing underwater stock options...

If my company offers me an option exchange or reprices my underwater options, will there be any tax impact on me? What factors should I consider in accepting the exchange?  This is premium content

Very few companies arrange a straight repricing of outstanding options. Companies concerned about widespread and deeply underwater options may offer an...

If my company or a third party buys my employee stock options for cash, how is this taxed?  This is premium content

You recognize ordinary income for the full value of the cash payment. Any deferred portion of the cash sale proceeds is not taxable until...

How many employees at Microsoft elected to exchange their underwater options for cash? 

According to a statement the company issued on December 11, 2003...

UPDATED! In an acquisition, can the buyer assume just my in-the-money options and not my underwater options?  This is premium content

In an M&A deal, the buyer can assume or convert just the valuable stock options and cash out the underwater options or let them...

If my company cancels my underwater stock options, will they still count against the $100,000 ISO limit?  This is premium content

This depends on whether the ISOs are already vested. According to the final IRS regulations on ISOs...

My company will let me exchange my underwater options for restricted stock. What is the tax impact?  This is premium content

An option-for-option exchange is not taxable. But when you exchange underwater options for restricted stock...

What tax treatment applies if I exercise vested pre-IPO options that now cost more to exercise than they are worth?  This is premium content

In a public company you would never exercise underwater stock options. In a private company...

In a divorce case, how do you argue that underwater stock options have value?  This is premium content

When the net intrinsic value of the stock is zero, the attorney for the nonemployee-spouse has two ways to obtain...

At death, the value of options is included in the gross estate for estate tax purposes. But what happens if the stock's value drops below the exercise price and the options expire unexercised?  This is premium content

When options are exercised, generally the estate or beneficiary is able to take an income tax deduction for the amount of estate taxes already paid by the estate. But when they are not exercised you cannot take the deduction against other income...

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Featured FAQs
NEW! Can I sell my company stock through a blind trust as a defense against insider trading? This is premium content
Using a blind trust goes beyond the protections of Rule 10b5-1 plans, yet has more restrictions. These are irrevocable grantor trusts with...
Which do companies grant more often: restricted stock or restricted stock units (RSUs)? This is premium content
Starting with the broad grants of RSUs at Microsoft and Amazon, recent corporate practices suggest it is more likely that your company will grant you...