I received a sizeable amount as a bonus in the form of European-style call warrants. Because I don't fully understand every aspect of them and because the underlying security is one I have no faith in long-term I want to eliminate that position entirely. I don't mind spreading the sale out over a long period of time, but given that the golden rule of investing seems to be to immediately sell anything you wouldn't buy, I'm not sure how to time this.

It appears that this is popular bonus scheme that a lot of companies in my neck of the wood sign up for which means that at the time these warrants are vested, which is the same for everyone, their value takes a sharp nose dive as a lot of people sell. Which means selling immediately is out as well.

This question is similar to quite a few others on here about timing a sale or reducing a position, but most of the advice given elsewhere isn't all that relevant. Taxes don't enter the equation, I never wanted to buy into the position in the first place and I'm under no time pressure to sell.

Ultimately I'm just planning to sell portions over time as if I'm using dollar cost averaging to minimise the risk of mistiming the sale. But this could be my risk-aversion talking. Am I approaching this wrong or is spreading out sales the safest strategy?

  • Were you expecting a particular dollar value for your bonus? If so, would you get about that amount in cash if you sell the warrants immediately? Or was the bonus more 'blue sky', with the hope that one day they'd be worth a lot? – Lawrence Oct 11 '18 at 9:47
  • @Lawrence Bonus amount was fixed as a percentage of salary that was then converted into warrants. Theoretically you could sell on release but the main risk is that the influx of orders pushes price down and you're last in the queue. The warrant purchase price was set earlier this week so after the bloodbath on the markets in the past days I'm already down 8%. So it would seem my question won't be all that relevant for the foreseeable future. (For added fun, I'm also paying 60% tax on the original amount regardless of whether I sell and at what price.) – Lilienthal Oct 11 '18 at 10:35

The only case in which there's an expected advantage to spreading out your sales is if the option in question is somewhat illiquid and you have a lot of it to sell. In that case, going to sell all of it at once can actually push the price down. However, in that case you would just spread the trades over the course of the day, or a few days.

Spreading the trades out over a longer period of time may seem like it's safer, but remember:

  1. The optional value of the options will fall because options have a fixed life. For a given price of the underlying, options with a lot of life in them are worth more.
  2. You will be bearing your company's risk by holding on to some of the options while executing your strategy of selling over time. It's plenty likely that the company's stock will fall, reducing the value of your options. Since you work for this company, you are already exposed to its risk plenty, you should not want to load up even more in your investment portfolio by holding on to these options.
  3. Note that at the moment, the volatility of the market is very high when compared with what it has been over the last few months. High volatility makes options worth a lot. I don't want to make predictions about the future, but comparing with the past, right now's a pretty good time to be selling options. You don't know if/when the price will come back to where it was.

In short, sell those guys right away unless you really have a LOT of them. If you want to try and time the market, wait until it seems like a good time and then sell all of them.

  • Hmm, I see your point. Unlike buying in, selling in this case doesn't really need to be spread out: either the price is at a point I'm happy with or it's below its intrinsic value in which case it makes sense to hold and wait for it to recover. I guess I did approach this wrong initially. I'll have to take into option lifetime I suppose, though at ten years I doubt there'll be an immediate effect. (The underlying security in my case is an index, not my company, but your #2 is very valid for anyone who gets company stock as bonus.) – Lilienthal Oct 13 '18 at 19:45
  • How do you get a warrant on an index? Sounds like a contradiction in terms at first glance. A warrant, by definition, creates new shares when exercised. – farnsy Oct 13 '18 at 23:04
  • That's where the "I don't fully understand every aspect of them" part of my question comes in. Can't really disclose any more details about this warrant without becoming too identifiable I'm afraid. – Lilienthal Oct 14 '18 at 9:12

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