Stock options

[red sky]

I started at EnCana the day after the announced split on the Sunday. I get my options from the price on Friday and will have an option for each company... couldn't ask for better timing.

I suggested taking some profits but keeping the rest until they vest... as other's have recommended

[Slava]

I breezed through a lot of this thread, admittedly. There is a concern with selling the stock and then borrowing re-buying though; you have to wait 30 days otherwise you are going to be offside. What you could do however is sell one company and buy another holding that is very, very similar.

As far as the stocks splitting, its basically a nothing move. It feels like found money, but the stock price also splits so you are really no further ahead in that regard; if you had $10k before the split you still have $10k after.

[stang]

Originally Posted by Slava

I breezed through a lot of this thread, admittedly. There is a concern with selling the stock and then borrowing re-buying though; you have to wait 30 days otherwise you are going to be offside. What you could do however is sell one company and buy another holding that is very, very similar.

As far as the stocks splitting, its basically a nothing move. It feels like found money, but the stock price also splits so you are really no further ahead in that regard; if you had $10k before the split you still have $10k after.

in 2004 our stocks split from 80 to 40.

7 months later they were back up at $80

I feel more confident in the ability of our stocks to go from $50 to $100 then for them to go from $100-$150 in the same amount of time.

[Slava]

^ I understand how the split works and why people get excited about it. In truth though your wealth has not increased as a result of the split. The optics are great and for diversity of your portfolio it could be a great thing, but the money is the same at the end of the day.

[Bring_Back_Shantz]

Originally Posted by stang

in 2004 our stocks split from 80 to 40.

7 months later they were back up at $80

I feel more confident in the ability of our stocks to go from $50 to $100 then for them to go from $100-$150 in the same amount of time.

Really,
You think that your company can grow it's market cap 100% easier than it can grow it 50%.

The only thing a split does is make the stock easier to trade and yes this usually means that initially stock prices will rise, but the overall impact on the value of the company is negligable.
If a company is going to split and go from $50 back to $100,
then it would have gone from $100-150 no problem.

[Sylvanfan]

Agreed that splits are initially attractive to an uninformed buyer because they think the price looks cheaper. What they don't realize is that they're just buying a smaller portion of the company, and a smaller part of the profits.

[stang]

Originally Posted by Sylvanfan

Agreed that splits are initially attractive to an uninformed buyer because they think the price looks cheaper. What they don't realize is that they're just buying a smaller portion of the company, and a smaller part of the profits.

If I have 1000 SO with a stike price of $50

If they split at $100 then I now have 2000 SO with a strike price of $25. If it goes up $50 dollars back to $100 I have $150,000

However if it doesnt split, and goes up $50 form 100 to $150, I would have $100,000

Am I looking at this wrong? I am still trying to learn here...

EDIT: Also thanks for all your help...

[Slava]

You have it incorrect there. If the shares split at $100 you have 2000 shares then at $50/each. This is $100,000 both before and after the split.

If they rise to $100 after the split you have $200,000. If they had never split but went to $150 a share then you have $150,000 so it appears that you are ahead. The issue is that you are comparing different growth in the share price though. On a dollar-dollar basis it is the same, but as a percentage its half the growth.

[Sylvanfan]

Originally Posted by stang

If I have 1000 SO with a stike price of $50

If they split at $100 then I now have 2000 SO with a strike price of $25. If it goes up $50 dollars back to $100 I have $150,000

However if it doesnt split, and goes up $50 form 100 to $150, I would have $100,000

Am I looking at this wrong? I am still trying to learn here...

EDIT: Also thanks for all your help...

No that's how it would work. But you're sort of comparing apples to oranges. If the company grows 50% in value....your $50 split stocks would be worth $75 just like the old 100 is worth 150. Essentially you're trying to compare 100% growth to 50% growth. IMO stock price isn't a big enough factor to make a companies growth go from 50% to 100%, it's more or less a non factor long term.

[stang]

Originally Posted by Slava

You have it incorrect there. If the shares split at $100 you have 2000 shares then at $50/each. This is $100,000 both before and after the split.

If they rise to $100 after the split you have $200,000. If they had never split but went to $150 a share then you have $150,000 so it appears that you are ahead. The issue is that you are comparing different growth in the share price though. On a dollar-dollar basis it is the same, but as a percentage its half the growth.

Is that first part true? I thought the strike price split as well?

look at it like this: with 1000 shares at $50 SP I owe my company $50,000 of whatever I sell

If the stocks split and I have 2000 at $50 I now owe my company $100,000 of whatever I sell? And since the price is now down to $50 I have NO profit because of one split.

I think you are mistaken, as 2000 SO at %25 SP is back to the original $50,000

[JohnnyO]

1. Buy some vaseline and take a deep breath
2. I am not 100% sure on this but 50% of your gain is taxed as Employment Income at your marginal rate which would probably bump you into the next bracket. If you exercise and cash them right away. You can defer the gain if you hold on to the shares. But then you are also subject to capital gains as well as income.

[Bring_Back_Shantz]

Originally Posted by JohnnyO

1. Buy some vaseline and take a deep breath
2. I am not 100% sure on this but 50% of your gain is taxed as Employment Income at your marginal rate which would probably bump you into the next bracket. If you exercise and cash them right away. You can defer the gain if you hold on to the shares. But then you are also subject to capital gains as well as income.

I don't see why you think he is gonna get raped on them.
Stock options should be taxed as capital gains, which means that on 50% is taxed as income, which you stated.
But that isn't really a bad thing because the other 50% is tax free so you are paying half the tax you would otherwise.

As for getting bumped into the next tax bracket, big deal, everthing else he makes is still in the lower bracket anyway, so even if the options are in the highest tax bracket, he's still only going to be paying no more than ~25% tax, which is less than he's paying on his base salary as it is.

That's one of the nice things about stock options is that you pay WAY less tax on them than normal income, so yeah, you're paying a lot of tax, but it isn't so bad that you need any lubricant.

[JohnnyO]

Originally Posted by Bring_Back_Shantz

I don't see why you think he is gonna get raped on them.
Stock options should be taxed as capital gains, which means that on 50% is taxed as income, which you stated.
But that isn't really a bad thing because the other 50% is tax free so you are paying half the tax you would otherwise.

As for getting bumped into the next tax bracket, big deal, everthing else he makes is still in the lower bracket anyway, so even if the options are in the highest tax bracket, he's still only going to be paying no more than ~25% tax, which is less than he's paying on his base salary as it is.

That's one of the nice things about stock options is that you pay WAY less tax on them than normal income, so yeah, you're paying a lot of tax, but it isn't so bad that you need any lubricant.

Oh I agree that options are a nice way to reward employees and 50% tax free is as good as it gets, but paying the tax man is never fun and a lot of people, forget to plan for a bill from CRA.

[SeeGeeWhy]

What are your objectives?

Bottom line is that people should invest to give them the life style they want.

Do you NEED the money? Then sell enough to cover what you need.

Are you looking for long term growth? Then hold and exercise as late as possible.

As others have said, CNQ is likely going to take a huge windfall when Horizon comes online. I'd be apt to find the money you're looking for elsewhere.

[macker]

There is a reason that Berkshire has never split.....
And then on the other end of the spectrum you have Nortel who has been know to do 3 for 1 reverse splits....what a joke....

[Suave]

Originally Posted by stang

Is that first part true? I thought the strike price split as well?

look at it like this: with 1000 shares at $50 SP I owe my company $50,000 of whatever I sell

If the stocks split and I have 2000 at $50 I now owe my company $100,000 of whatever I sell? And since the price is now down to $50 I have NO profit because of one split.

I think you are mistaken, as 2000 SO at %25 SP is back to the original $50,000

Let say you were granted 2,000 options at $50. The cost to buy them out is $100,000. Share price is at $100, so you have $100,000 profit.

Let say a 2:1 split happens tomorrow. Now you have 4,000 options at $25. The cost to buy them out is still $100,000. And at share price of $50, would still give you $100,000 profit.

Splits have no bearing on stock price, they only help liquidity. The true value of an O&G company is based on things such as its production, cash flow, reserves and earnings. Multiples are added to these values to come up with the value of the company. Which you then divide by the number of shares outstanding to get your stock price. It’s not any easier for CNRL to go from a $50billion dollar company to a $100 billion if its stock is now trading at $1or $100. Never evaluate the attractiveness of a company based solely on is share price, rather look at its marker cap.

[Bring_Back_Shantz]

Originally Posted by Suave

Let say you were granted 2,000 options at $50. The cost to buy them out is $100,000. Share price is at $100, so you have $100,000 profit.

Let say a 2:1 split happens tomorrow. Now you have 4,000 options at $25. The cost to buy them out is still $100,000. And at share price of $50, would still give you $100,000 profit.

Splits have no bearing on stock price, they only help liquidity. The true value of an O&G company is based on things such as its production, cash flow, reserves and earnings. Multiples are added to these values to come up with the value of the company. Which you then divide by the number of shares outstanding to get your stock price. It’s not any easier for CNRL to go from a $50billion dollar company to a $100 billion if its stock is now trading at $1or $100. Never evaluate the attractiveness of a company based solely on is share price, rather look at is marker cap.

Fixed. I'm sure it was a mistake, but remember that the share price splits as well.

[prarieboy]

Originally Posted by stang

My compny gives out hire on stock options. But they vest over a 5 year period. Right now For some reason the stock price are up pretty high. Having been with the company 2.5 years I could only potentially sell 40% of my stock options. If I sold my SO right now I could make 20-25K (which would be awesome as I am in the process of building a new house, and am seing my credit card bill keep going higher)

However I guess the potential is that these stocks just keep going up over the next 3 years, and I could be sitting with way more then I could sell for now. Especially since we have our Oilsands project scheduled to come online in August fo this year. (I work for CNRL, stock quote CNQ)

So what does CP recommend? I am kind of leaning towards the sell some now while high, but since I have to leave some in they can sit for 3 years. At least I will be feeling better about our house situation NOW and I will still retain 60% of the SO for if something crazy DOES happen.. (like a split or prices continue to skyrocket)

NM

[flamesaresmokin]

Originally Posted by Sylvanfan

But if you do sell keep the tax considerations in mind, like don't spend the 12 grand and than get stuck with a 3 grand tax bill come next April.

That would make for an unhappy tax return next april lol.

[stang]

Originally Posted by prarieboy

Do you have anything in the stock savings plan?? Maybe you could cash out some of that dough and hold the options. I was at Horizon last week and it's really coming together. In addition CNQ will be producing a great deal more in 2009 while at the same time reducing expenses. If I had extra money I'd buy CNQ, not sell it.

I put mine into the RRSP, not the savings... I should switch that though... I think I would like the flexibilty of the savings plan....

However my retirement is looking pretty good for a 25 year old...

Originally Posted by Suave

Let say you were granted 2,000 options at $50. The cost to buy them out is $100,000. Share price is at $100, so you have $100,000 profit.

Let say a 2:1 split happens tomorrow. Now you have 4,000 options at $25. The cost to buy them out is still $100,000. And at share price of $50, would still give you $100,000 profit.

Splits have no bearing on stock price, they only help liquidity. The true value of an O&G company is based on things such as its production, cash flow, reserves and earnings. Multiples are added to these values to come up with the value of the company. Which you then divide by the number of shares outstanding to get your stock price. It’s not any easier for CNRL to go from a $50billion dollar company to a $100 billion if its stock is now trading at $1or $100. Never evaluate the attractiveness of a company based solely on is share price, rather look at its marker cap.

Yeah i get all that except the last line. Just that Slava said that if the stocks split that my strike price stays the same and that didnt seem right. Our stocks seem to rebound quickly after a split... Thats why I was hoping for a split.

I think I need to keep these SO's right where they are... If I sell now and in 3 years I end up losing $100,000 I will be more pissed then if they tank and in 3 years I am only holding $60,000 or less.

However any time its possible for me to become Mortgage free.. Im selling baby.