Have
you ever wanted to do basic option analysis for a prospect but didn't
know where to begin? This
month's tip will provide you with an approach to do just that using
StockOpter®! To get started you will need some basic data about your
client or prospect. Since the goal is to provide an initial introduction
about what you can do for the client, the detail of data is not
too important. The key pieces of information are: estimated income
over the next 15yrs, estimated itemized deductions, the client's
grant information and any other company holdings the client has.
Enter
the income information on line 12 of the Assumptions sheet and deductions
on line 25. Now, make some basic assumptions about the stock price,
growth rate (dividends if applicable) and the Investment Account
(rows 58-61). Finally, enter the client's grant and share information
on the BaseCase. You are now ready to create your "Quick &
Dirty" analysis. Click on the DI icon on the tool bar. Enter
a diversification rate of say, 25%. Enter a multiple of the exercise
price. Pay attention to the FMV of the stock relative to the client's
strike price(s). The Diversify strategy will only exercise and/or
sell if the FMV exceeds that multiple. Finally, select two companies
to use for the analysis. IBM and Halliburton are good choices. Click
OK and let StockOpter® start crunching the numbers.
When
the program finishes you will be looking a chart that has two blue
and two green horizontal bars. The final piece is interpreting this
simple, one-page report for your client or prospect. What is going
on in this report you ask? It's actually quite simple. For each
company selected, StockOpter® will compare two strategies. One strategy
(ALAP) is designed to represent a "hold 'till last minute"
approach. This is the blue bar. The other strategy (Diversify) is
designed to demonstrate how a systematic diversification plan, roughly
approximate to an SEC 10b5-1 plan, would perform in relation to
the common philosophy of waiting until the last minute to exercise
your options. This is the green bar. The price assumptions for these
strategies are based on the most recent 14 years of the companies'
selected.
You
will likely be able to illustrate that a systematic diversification
plan can produce similar, if not better, results to the ALAP strategy.
The key difference is the significantly lower risk inherent to a
diversification plan. This process can be an excellent way to win
new business and can be the first step toward garnering more assets.
For more information on how the Diversification Illustrator works,
read about it in the StockOpter®
User's guide.
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