Read Time: 4 minutes
Welcome to the 37th edition of the Tech Financial Planning (TFP) newsletter
If you have a big bunch of company stock, figuring out what to do with it can be paralyzing.
While the textbook answer is to sell most (all) and diversify, that is easier said than done.
In this newsletter, we’ll break down a case study of how we are using covered calls to diversify a client’s holdings while generating thousands of dollars in income.
TL;DR
Our client Bob is a former Procore employee with a bunch of Procore stock
While Bob understands diversification is key, he wants to sell his stock at certain prices
We will use covered calls to create extra cash while we wait for the stock to hit said prices
In our first go-round, this made Bob around $8,000!
The Facts
Enter Bob.
Bob is a former Procore employee.
He was an early employee and got a good chunk of equity during his time there.
Bob has about 22,000 shares of PCOR currently, which as of writing, are worth about $1.4M total.
This is a really big part of Bob’s total net worth.
He understands the need to diversify, but he also doesn’t want to rush out and sell immediately.
For now, he is willing to sell half of his shares (11,000) over time, but he wants to sell based off price.
The way he sees it, he wants to sell a chunk at $70/share, at $85/share, and then another at $100/share.
Planning Note: Yes, the textbook answer would be to sell now and diversify. But for a number of reasons, Bob doesn’t want to, and candidly, they don’t need to right now either.
Before Working Together
Before working together, Bob was sitting on his shares, waiting for the stock to get to these target prices.
But Procore stock hasn’t been above $70 / share since late 2021.
So for the last 18 months, he’s been patiently waiting as Procore’s stock price bounced between $43.50 and $68.
When we started working together, we decided if he wanted to stick to these price targets, he might as well get compensated for his patience.
Enter Covered Calls
After meeting and discussing over a couple months, we decided to sell (write) call options (ie covered calls) to a) generate income and b) diversify.
For now, we would target selling 50% of Bob’s Procore shares through covered calls over time.
Our initial strategy is to set them up at three tranches:
Tranche 1 - 3,000 shares at $70 / share
Tranche 2 - 4,000 shares at $85 / share
Tranche 3 - 4,000 shares at $100 / share
Ultimately, this would generate $950,000 (pretax) that we can use to reinvest in a diversified portfolio, leaving him with 11,000 shares of PCOR
$950,000 = (3,000 shares x $70/share) + (4,000 shares x $85/share) + (4,000 shares x 100 / share)
$950,000 = $210,000 + $340,000 + $400,000
This $950,000 doesn’t include any premiums generated while writing these calls
Note: This is not a comprehensive overview on covered calls.
I wrote a high level article on the strategy, but I can’t stress enough that you should a) do your own research and b) talk to someone
Our First Go-Round
Earlier in June, Bob and I met to write our first set of covered calls.
We wrote 30 contracts at a $70 strike price with a July 16 expiration date and 20 contracts at a $85 strike price with an October 21 expiration date.
Remember, one contract equals 100 shares.
So in essence we “put up” 5,000 shares (out of 22,000 right now).
Together, these two generated about $8,000 in premium for Bob, which he was very happy to get!
Because this was our first time doing this, Bob didn’t want to put up all 4,000 shares at $85
He wants to start slow and make sure he understands the process
Additionally, the premium we could get for $100/share wasn’t worth the risk / potential upside.
What Happens Next
First off, Bob gets the ~$8,000, and it’s his to do what he wants with it.
We will discuss how to align this (somewhat) recurring cash with his goals.
If the strike prices are never met, the options will expire worthless and Bob gets to keep the shares (and the premium).
That means if Procore never reaches $70 / share by July 16 or $85 / share by October 21, he gets to keep all the shares
If the stock price closes above the strike price, the contract will be assigned and the shares will be sold at that price (our example - $70 / share by July 16 or $85 / share by October 21).
And that’s great, because that’s the price they want to sell at!
On an ongoing basis, we will continue to talk and monitor the situation.
If Procore stock price drops, we will need to reevaluate and see if
The premium is worth the risk
Do we lower our strike price to get a better premium (probably not, because they want to sell at a certain price.
Do we write a contract for a date further in the future?
We will continue to write covered calls over time to continue to a) generate income and b) diversify Bob’s holdings.
Putting it all together
I really like this opportunity for Bob.
It allows him to make extra money while setting a price that he is comfortable selling at.
Additionally, it takes some of the emotion and the decision making out of Bob’s control.
The downside is it’s a more complicated tactic, and his life is already busy.
Plus, it’s not a “true” hedge for his Procore stock.
The premiums we make will pale in comparison to the amount he could lose if Procore stock drops drastically.
But so much of financial planning is an ongoing process.
It’s not black and white, this or that.
We are moving Bob in the direction of his goals, which is a huge win, both for me and more importantly for Bob.
have A Big Bunch of Company Stock?
If you're a tech employee and want to work 1:1 on:
Building a systematic approach to building wealth
Making the most of your company stock (and not getting blindsided with taxes)
Maximizing your cashflow
I only take on 1-2 clients each month.