This presentation explains one of the myths about optimal management of your employee stock options http://www.wiley.com/WileyCDA/WileyTitle/productCd-0470471921.html

1. .
Selling Calls against Employee Stock Options Extends
Alignments
Does Selling Exchange Traded Calls to Generate Income and
Reduce the Highest Risks of Holding Employee Stock Options
Extend the Purpose of the Options Grant?
Whenever I speak with a person who has some experience with
employee stock options, I generally get the comment that
hedging by selling calls defeats the object of the options grant.
The person claims that the purpose of granting ESOs is
to align the interest of the company with the
interests of the executives. The claim is that hedging
the ESOs essentially reduces the equity position of the
executive and that defeats the object of the grant
and it should be discouraged or prohibited by the employer.
That idea is just another myth that pervades the Employee
Stock Options industry.

2. .
Let's look at the idea closely.:
We will do so by way of an example.
Many executives these days own stock along with their
employee stock options. Assume that an executive owns
4000 shares and ESOs to buy 10,000 shares with an expected
expiration date of five years from today.
The options are exercisable at $50 with the stock
trading at $75 (a highly risk position)
In traders lingo, the two combined positions may have a delta
of long 12,700 shares (i.e. +4000 from the stock and +8700
from the options). So here the executive could be perceived
as owning the stock equivalent of 12,700 shares.
If he were to a) sell the 4000 shares (which is not discouraged
by the company) he would reduce his deltas by 4000 shares
and thereby reduce his alignment by 4000 shares.
If he were to b) prematurely exercise ESOs to purchase 4000
shares and sell the stock received, his deltas would be reduced by
perhaps 3480. This of course is not discouraged by the company
after vesting even though it will have reduced the executives
alignment with the company by 3480 stock equivalents.
If he were to c) sell his 4000 ESOs on some new transferable
options plan, his delta would be reduced by 3480, thereby
reducing his alignment accordingly.

3. .
This type of transferable option was introduced by Google at the
encouragement of Morgan Stanley.
If he were to d) sell (write) listed LEAP calls on 4000 shares of
stock with an exercise price of 80 against the 4000 shares,
this would reduce his deltas by perhaps 2400. His alignment
would be lessened by the 2400 deltas.
So why would the company discourage or prohibit d) and not discourage
a), b) or c), because a), b), and c) all reduce the alignment more that d).
Some companies actually try to use their Insider Trading Policy
to prohibit the sale of calls, when there is no prohibition in the Stock Plan
contract document or the grant agreement contract. They do so in order to make
early exercises of ESOs the only way to reduce the risk of holding substantially
in-the-money ESOs. Their true purpose is to create the early cash flows and
reduce the company’s liability to their employees, and thereby creating
earlier Assets Under Management for the wealth managers.
In fact, discouraging d) reduces the value of the options in the
eyes of the informed executive/grantees. This reduction of value
requires a larger grant to executives to create the same
incentive. If the call selling was not discouraged, the executives
would perceive the ESOs to have more value, thereby requiring less
total options granted.

4. .
In fact, if companies were to encourage a gradual call selling of
the ESOs from the date of vesting to expiration day, this would
create more value in the eyes of the executives and require
fewer grants and less expenses against earnings. This would
also provide the executive an efficient way to exit his options
positions, reduce risks and delay taxes.
John Olagues
504-875-4825
www.optionsforemployees.com/articles
http://www.amazon.com/Getting-Started-Employee-Stock-Options/dp/0470471921