Cashing in on your options

So I posted this on Patri's blog, but I thought some other people might be interested in what to do if your company has given you stock options which are worth money and you want to hedge against a dramatic drop in value.

Shorting your own stock is of course illegal, but one thing that you may consider is to short a similar stock or a competitor. That way if the whole sector tanks(like the internet bubble bursting again), your short position will help you hedge against the drop of your options. You are limiting your risk to relative valuation of your options to the company you are shorting.

The risks are thus:

1: If you pick a similar stock that isn't really similar at all, you are just shorting that stock and going long on your own company as two separate positions(you could short the NASDAQ or some technology index as a barometer).

2: Your short stock goes through the roof, forcing a margin call. This means of course that you'll have to cash out on your options which are not quite as liquid. You may have to scramble to sell your options to cover the margin call. You probably only want to short enough to cover the options that you have vested(which is probably zero right now assuming a standard Valley vesting schedule of nothing for 1 year, then you get 1/4 followed by 1/48 monthly or 1/12 quarterly).

3: Not for the faint of heart. While this is a hedging strategy, it is possible you will lose significantly more than just the value of your options. This is not something I'd recommend to everyone, but some people can probably handle it both intellectually and financially if for some reason you get a unfortunate confluence of your stock options tanking and your short position rising phenomenally.

Note that I have never done this, but I may if I ever get the opportunity again.