Home Benefits It takes two to tango

It takes two to tango

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When you sell a the option for someone to buy your stock, money is deposited into your account and you’re free to withdraw the money to buy yourself something nice or re-invest into another opportunity. Just who is paying you this money to do what you please?

When you sell covered calls against your ESPP shares of stock, the person paying is a buyer who wants to own the stock at the same price you’re interested in selling the stock at. You might be selling to offset expenses, because you think the stock price is over-valued, or because you want to diversify your investments away from your employer.

The buyer on the other hand may not own any shares of the company you work for, or perhaps they are just building a position they want to hold for another ten years. They believe in the future of the company so much that they’re willing to pay you a little money now to reserve the right to buy the shares of the company from you at that higher price.

As an employee and shareholder of the company, this positive outlook on the company is actually aligned with yours. Well unless you’re selling your shares because you don’t believe in the company any longer… in which case you wouldn’t really be an employee or shareholder for much longer.

With the interests aligned, you’re employer is giving you free money by selling you newly issued shares of the company stock to you at a discount. They do this because they want employees to be company owners and this is a benefit that contributes to this goal. Your employer wants you to be an owner because they believe you’ll make more ownership driven decisions that contribute to the long term success of the company.

The potential buyer of your shares, the person paying you the money for the option to buy the shares later at a higher price is also offering you free money because they believe in the outlook of the company. All parties in the transaction share a similar positive outlook yet you, the employee participating in the employee stock purchase plan and selling covered calls are the only one benefiting from the free money being thrown around.