Part 1 I explained what Stock Appreciation Rights are and why companies sometimes use them as performance incentives or employee bonuses. I also mentioned how SARs can backfire: they are based on the assumption that the underlying stock price will rise. Ha! Obviously my upper management fell for that one. (Or else they were very cunning at devising an apparent bonus which actually costs them nothing….Hmmm….) Which is why I’m now stuck trying to time the market, even though market timing is a losing game.
Stock Appreciation Rights: Use Them or Lose Them
Most SARs come with an expiry date. This can make it very tricky if a stock is underwater near the time the options will expire.
For example, say stock options in Goldcorp were awarded with a stock price of $40 in 2012 with an expiry date of December 31, 2013. Here it is September of 2013 and the stock is trying to break the $33 barrier. Not the best time to have options expiring!
If the employee exercises the option to use the stock appreciation rights today, nothing will happen. There is no increase in value of the underlying stock so no money will be received by the employee. While a stock is trading for less than the award price, the decision to do nothing and just wait is simple.
What to Do When SARs are Just Breaking the Surface
Now let’s imagine there’s an employee of another big Canadian company: Bank of Nova Scotia. Say he was awarded 1000 stock appreciation rights at $59 in February 2011. They expire December 31, 2013.
As you may know if you track BNS, it behaves a lot like a Blue Whale. It rises to the surface to breathe, then sounds deep and long searching the bottom for some mysterious object. So since February 2011, BNS has been above $59 for 20 days in 2011, 0 days in 2012, and 44 days in 2013 to the end of August. Its high this year was $61.84, with a highest daily close of $61.43 which is more relevant to SARs. (Many SARs can be exercised only at the price at the close of the last trading day.)
Last week the price for a share of BNS climbed to $60. What should our employee do? Should he exercise his stock appreciation rights now, to lock in an amazing $1000 (before tax) profit? Or should he wait and hope it goes up a bit more. Remember, if the stock price rises to $61, the employee makes a $2000 (before tax) bonus. That’s a big difference for a small change in the stock price.
Of course, if the stock dips to $59, the employee makes nothing. Zip. Nada. Even the tax man gets nothing.
Why Exercising SARs Reminds Me of a Radio Game Show
My own situation is pretty similar to the BNS example. I could exercise all of my stock appreciation rights today and make about $1 a piece (before tax) for each unit. Or I could wait one more day and see if I make more than $1 a piece. But I could lose everything if the stock drifts down again.
It’s like one of those radio shows where the caller can keep what’s in the first envelope, or open a second. They could find more money in the second, or they could find it’s empty. I hate those shows! I don’t like suspense and I don’t like gambling. I’m always shouting at the radio telling them to be happy with what they’ve won and not risk losing it all.
You can bet I’m not thrilled trying to choose when to exercise my SARs. But time is running out so some kind of decision has to be made.
Why and How I’m Trying to Time the Market: the Wishy-Washy Approach to Stock Appreciation Rights
Being essentially greedy and also nervous and conservative is a bad combination. It’s led me to a wishy-washy approach to exercising my stock appreciation rights.
I’ve mentally divided the number of units I can exercise into several bundles. Each bundle gets exercised immediately if the price reaches a certain point, or it gets exercised by a deadline, providing it will at least make anything.
It’s risky though. Like BNS, the underlying stock has a bad habit of going down and staying down for lengthy amounts of time. And there’s only a few months left before the SARs expire. I could deeply regret not exercising today and getting the $1 per share.
Wish me luck. I have a feeling I’m going to need it.
P.S. Yes, I also own shares in BNS. I think I’ve mentioned before that you don’t want to copy my investing decisions!
Related Reading
- Part 1: SARs: Not Just a Disease, Also a Worrying Financial Decision to be Made
- When Wishy-Washy Works: Taking Part Profits from a Skyrocketing Stock
Join In
Do you think I should stop waffling and exercise the whole lot for $1 each before tax? Do you think a multiple exercise scheme is a good idea? What would you do? Please share your experiences and expertise with a comment.
“Being essentially greedy and also nervous and conservative is a bad combination”
I think you just nailed the description of (almost) every single retail investor in Canada. Including me. What a perfect turn of phrase!
Many investors, anyway. I’ve met a few who are essentially greedy, unflappable and impulsive: They don’t seem to excel at timing investments either. : )