SEC Approves Path for Monetizing Employee Options

On June 17, the Securities and Exchange Commission (SEC) issued a new rule allowing employees with vested stock options to use them as collateral to purchase call options on the same company's stock as a way to obtain some cash value for the shares they can exercise. Call options allow an investor to sell a right to buy shares at a given price (say, $50) to an investor who can purchase the shares at that price ($50 in this example) over some period of time. If they are at a higher value (say, $60) when purchased, the option holder can profit. If the right expires, the investor gets to keep the premium made from the sale. In effect, this strategy hedges potential losses by giving up the right to some potential gains. Until this ruling, vested options could not be used as the sole collateral to purchase call options because such transactions were considered to be "naked."
Currently, one company (iOptions Group LLC) has a patent on a business model to do this and has been urging the SEC to allow it. The patent might be challenged in court, however. Many companies do not allow executives to engage in hedging strategies on their options because they want the executives to have a continued stake in the company after exercise. Whether companies would extend that to all employees if this approach becomes widely available is not known. The ruling can be found at this link.