There's nothing more to be gained from holding on to unexercised options that are so far in the money.
NFLX stock price July 2022 to July 2025 (via Yahoo! Finance)
This is not financial advice to a broad group. This is an example of the advice I give my clients who work at Netflix.
I know you have seen how much Netflix stock has gone up and how good that felt. You don't want to regret selling and seeing the stock go up even more. With so many exciting opportunities ahead for the company, and seven more years to hold on to the options, why not wait a little longer and make a little more money?
But how long?
At what point do you decide to cash in? Do you wait until just before the expiration date? Is there some point where it makes sense to sell the options? It feels right that there is a time well before the expiration date, where you want to lock in your gains and remove the concern of a big stock drop when the options expire.
This is where looking at the in-the-money value, time value, and leverage of the options helps you decide when the downside risk is greater than the upside.
(I am not predicting the stock price is going to drop. I have no idea what Netflix stock is going to do. I am asking you to acknowledge the possibility that the stock price CAN drop.)
NUMBERS
The options purchased on July 1st, 2022 have an exercise price of $179.95.
The closing price of NFLX on Friday, July 18th was $1,208.10.
If you were deferring $10k/mo to invest in the Netflix Stock Option Plan, you would have purchased 138 options.
Each of these options is now in-the-money $1,028.15. Your 138 options are worth $141,884.70.
This is a 14.2x return on your investment in three years. You are averaged 139% per year over three years.
(100% return is doubling your investment. You have more than doubled three straight years.)
You participated in the high-risk/high-reward and you won. The leverage of having 2.5 options instead of one share of stock paid off big.
NOW IS THE TIME TO CASH IN SOME OF YOUR WINNINGS
Yes, there is going to be a big tax bill. And yes, you should probably sell more than just the 7/1/22 options. Looking at the Insight Ratio, for any options with an exercise price under $300, 90% of value of the options is currently in-the-money. (The other 10% is the future time value.) The leverage you had at the beginning is basically gone, the current share price is so far above the strike price that you are barely getting a better return than the stock itself.
You're not going to sell all of your options. All of the options purchased over the last year still have a lot of time value and leverage left for you to benefit from.
The moderate conservative strategy would be to sell any options with an exercise price under $450. These are far enough in the money and the leverage is reduced sufficiently that you can feel comfortable cashing out.
For example, the options purchased on November 1st, 2023 at $420.19 are now in-the-money by $787.91 per option. If you invested $10k in November 2023 to get 59 options, you now have $46,486.69 for this particular tranche.
It may not look as impressive as the absolute best case scenario from July 2022, but 4.6x in 21 months is still better than most investments can expect. This is actually a 145% annualized return, even better than your return from 7/1/22 to now.
Even if you wanted to be aggressive and hold out for more on the options you purchase in 2023 or 2024, the options from 2022 and those with an exercise price under $300 are so far in the money, continuing to hold on to the options is starting to move from aggressive to reckless.
Holding on to the 2022 options is starting to move from aggressive to reckless
I am not recommending this, but if you really wanted to hold on for another decade, you could sell the 2022 options, pay the taxes, then buy shares of NFLX in a brokerage account. You would get similar performance (not the same, there is still some leverage in the options), but now you have removed the expiration date of the options and future growth is taxed at long-term capital gains rates.
(There is some math where you could cashless sell the majority of the options, but pay to exercise and hold some. The proceeds from the sale would cover the taxes and the exercise cost. This is functionally the same, but requires a little more advanced planning.)
What is a reasonable expectation for any investment?
The stock market has average about 10% per year for a century. There are always stretches of single companies significantly outperforming, but part of investing in single stocks is thinking about time frames and exits in advance.
If you made a new investment today, what would you hope it earns in the future? Doubling in a decade only takes 7% per year, so that is definitely a reasonable expectation. Doubling twice within ten years would be closer to 14-15% per year, so likely outperforming the broader market over a long enough time frame.
So many of the NFLX option tranches have vastly exceeded even the most optimistic expectations.
Imagine back in 2022, when the stock price was around $190 and you were stuck contributing the amount you decided in 2021, when the price was over $600, getting close to $700. At that time, if you had to pick a price in advance to sell. What would you have picked? Would you have doubled the price to $400, when your options are now profitable from what you paid? $500? The $700 price that it barely touched in November 2021? What about $1000? 50% higher than it’s all-time high?
I’m guessing that whatever you would have picked , the current price has far exceeded it.
By any measure you choose, the options you bought in 2022 have been wildly successful. It’s time to sell.
Do you ever feel like you know you are doing what you should be doing, but in the back of your mind you wonder if you could do what you really want to do? Does it feel too crazy or too risky? I help my clients resolve this tension between what they think they should be doing and what they really want to do.
Let me know if you want to take that big, scary leap towards your best life.
If you have any questions, please feel free to email me at aaron.agte@graystoneadvisor.com or schedule a meeting.
Aaron Agte, CFP®, founder of Graystone Advisor, is a fee-only Financial Planner located in Foster City, CA, serving clients virtually in the Bay Area and across the country. He specializes in helping families with stock options, RSUs, and other equity compensation.
@AaronAgteCFP