Any holder of Employee Stock Options, who also owns

Employer Stock should immediately "write" slightly out-of-

the-money long term "qualified covered calls". Qualified

covered calls are not subject to the section 1092 Straddle

Rules.These are listed calls that have more than 30 days

and less than 33 months to expiration. He should "write"

these calls whether the ESOs are vested or not.

This is the case whether the stock is owned in his name,

in an IRA or a trust. This is the case whether he is an

executive, a manager or a truck driver.

This paragraph is for Officers, directors and holders

of more than 10% of the stock, who have to be concerned

with Section 16 b and c of the Securities and Exchange Act

of 1934. They should try to make their opening "writes" of

calls approximately 30 days prior to the expected grant

days of top executives grant day. Try not to write calls

immediately after the grant days. Wait 30 to 60 days after

the top executives have received their grants. Section 16

executives should avoid "writing" calls in the six month

period following the latest grant date if the market price is

greater than the exercise price of the latest grant.

(See the attached advice from Arnold Jacobs).

The volume of "written" calls depends upon the amount

of risk the ESO holder wishes to reduce.

Some of the reasons to make such "writes" are:

1) The proceeds of the sale come immediately to the

writer with no tax or borrowing. He can withdraw the

proceeds or allow the proceeds to remain in his brokerage

account and draw interest.

2) If the stock rises and there are liquidated losses on the

calls sold in the employee's personal account, he may get up

to an annual $3000.00 deduction against ordinary income.

Plus, any remaining losses can be used in the future to

offset other long or short term capital gains. There are no

taxable gains to report on the stock or the ESOs until

liquidated.

3) If the stock goes down, the hedger can sell part of the

stock and take a loss and deduct up to $3000.00 yearly plus

any remaining capital losses against other capital gains.

He should try to avoid or delay liquidating positions in

his personal account that result in a short or long term

capital gains tax. If he is an executive subject to 16b,

he must avoid at all cost closing out gains within

6 months of the opening trade.

Of course, if he liquidates a loss in the options, he

probably would be interested in making new opening

trades to maintain a similar hedge.

New Margin Rules:

Just recently, the listed stock options industry lowered margin

requirements for most positions. These new margin rules

make it such that a person who owns 100 shares of stock

outright can sell 7 calls (i.e 1 covered and 6 naked)

without advancing any margin. These rules make selling

calls much easier. However for many firms the minimum

margin required is $500,000 to get portfolio minimum

margins.

John Olagues

olagues@hotmail.com

http://www.brighttalk.com/webcasts/8004/attend

http://www.wiley.com/WileyCDA/WileyTitle/productCd-0470471921,descCd-google_preview.html

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.