Sometimes employers decide to prohibit hedging of ESOs or stock by the use of listed call options or futures on the employer stock. These employers believe that by making such prohibitions, the alignment of interests between the employee and the stock holders will be enhanced.

In my opinion it merely forces, in most cases, the risk averse employee to make premature exercises and sales of stock with the result of far greater reduction of alignment of interests. The prohibition merely adds a penalty to the reduced alignment by forcing the employee to forfeit part of the options value back to the company and pay an early tax upon exercise and sale. This prohibition is perceived to reduce the value of the granted options, thereby requiring the granting of additional ESOs to make up for the perceived reduction in value as a result of the prohibition.

This rest of this article must be requested from John Olagues olagues@hotmail.com

The author, JOHN OLAGUES, is a former member of the Chicago Board Options Exchange and the Pacific Stock Exchange for over ten years. He offers a unique view of employee stock options from a trader’s standpoint rather than from the standpoint of an accountant, compensation planner or academic. To contact JOHN OLAGUES email olagues@hotmail.com and  see www.optionsforemployees.com.