Many Advisors to optionees claim that the

optionees are prohibited from hedging their

employee stock options with listed calls and puts

because the company prohibits these sales by

contract or has policies to that effect.

My experience is otherwise.

It's quite easy to find out if your employer

prohibits or has policies that constrain hedging

while optionees hold ESOs. They can merely read

the Options Plan Contract and the Options

Agreement. Although there is generally a prohibition

against transferring or pledging the ESOs, there is

generally nothing there that prohibits such sales of

exchange traded options to hedge the ESOs.

These contracts and agreements generally state that

these two agreements and their terms constitute all

of the agreements relative to the Stock Options terms.

Maybe there is some other agreement beyond

the two mentioned above. If there are other

agreements, you should have copies of those.

You can find out more by merely asking the

company Investor Relations and they may tell you.

Or you may wish to call Human Resourses or have

your stock broker or lawyer call them.

Ask the official to write you a letter or have him

point to the language in some plan or agreement.

Reasons:

Why does your adviser generally say that the

company prohibits hedging? He tells you that

because he does not want you to hedge your ESOs.

It is as simple as that.

Many believe that there is a prohibition against

hedging, but few have ever looked into the issue.

Your advisoer wants you to make premature exercises,

sell the stock and invest the net after tax proceeds

in a managed fund where he can make his one percent.

It is also a big advantage to the company to have

employees make premature exercises.

The company receives the forfeited "time premium"

and gets an early tax deduction equal to what the

optionee must show as income. The company also gets

an infusion of cash equal to the exercise price.

The company also gets to use a shorter "expected"

time to expiration when calculating the "Fair Value"

of the ESOs that are expensed at vesting, thereby

lowering compensation expensing and raising profits.

Making premature exercises of ESOs is like making

early withdrawals from your retirement plan.

You get hit with a penalty for early exercise and

a penalty for early removal from your retirement plan.

In both cases the gain is ordinary income when the

early exercise and when the early withdrawal is made.

Some may say that even the officers and directors

make premature exercises. So it can not be all that bad.

Well, these insiders do so because they know that the

compensation committee will reload them with ESOs

whose value is greater that what they "forfeited" and

the taxes they paid. But the compensation committee

will not reload the average manager or employee with

a new grant upon exercise and sale of the stock.

John