- Company stock options can be valuable, but many recent initial public offerings have underperformed.
- If you have remaining stock options, you may pivot your purchase strategy or use the assets as leverage for your next job offer.
- And if you no longer want to keep losing stocks, you may consider tax-loss harvesting to offset other portfolio gains.
In a competitive job market, equity compensation such as stock options — the chance to buy stock in the company that employs you at a specific price — can be an incentive to sign on and stick around.
It can also be nerve-wracking when these assets underperform.
"Part of the deal when you have stock options is they can go underwater, and we're seeing a lot of that now with clients," said certified financial planner Kristin McKenna, managing director at Darrow Wealth Management in Boston.
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While 2021 was a record-breaking year for initial public offerings, when private companies first sell stock to outside investors, many returns have been disappointing.
After a volatile month, the Renaissance IPO ETF, tracking an index of the largest recently listed U.S. IPOs, had dropped more than 25%, as of Jan. 28.
Of course, IPOs also have the potential for lucrative returns. But if you exercised stock options and prices are down, you may be wondering what to do next. Here's what to consider, according to financial experts.
One of the first steps is to review the grant date to see when your remaining stock options expire, said Chelsea Ransom-Cooper, a New York-based CFP and managing partner at Zenith Wealth Partners.
"A lot of people don't know that they have 10 years from grant," she said. "So they feel as though they have to exercise during their vesting window."
However, taking more time during volatile periods may be reassuring, Ransom-Cooper said.
For example, rather than buying a certain number of shares each year, you may pivot, depending on price targets and potential growth, she said.
"The challenge is not a lot of people stay at a company for 10 years," Ransom-Cooper said.
If you're not planning to stay long-term, you may have only 90 days after leaving to exercise remaining stock options, she said. But it may become a bargaining chip since you'll compare future equity offers to what you're leaving behind.
If you're worried about volatility after exercising stock options, you may consider a so-called collar, which is designed to cap losses and gains, said McKenna at Darrow Wealth Management, with the cost hinging on the length of protection.
A collar involves two contracts: buying a put option, which allows you to sell if the stock drops to a specific price, and selling a call option, which permits the owner to buy the stock once it rises to a predetermined price, both during set time periods. The income from the call may help to offset the cost of the put.
You may buy and sell options through a brokerage, but these assets can be complicated and it may be best to work with an advisor, McKenna said.
However, if you're in a lockup period, typically 90 days to 180 days after your company IPO, the contract may limit what you can do with the stock, including selling or hedging strategies, she said.
"The best advice I can give people is don't prespend the proceeds," McKenna said, explaining how much prices can change from exercise to IPO and beyond.
And if you're ready to dump underwater stocks, you may consider selling to take advantage of tax-loss harvesting, which may allow you to offset other gains from the year, Ransom-Cooper said.