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Blatant attempt at FUD from IBT?

Discussion in 'TSLA Investor Discussions' started by SteveG3, Jan 16, 2014.

  1. SteveG3

    SteveG3 Active Member

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    #1 SteveG3, Jan 16, 2014
    Last edited by a moderator: Jan 16, 2014

    Unless I'm really misunderstanding how options work, this article seems like a blatant attempt to falsely imply that several Tesla executives used knowledge of Q4 delivery beat to their advantage.

    As I understand options, the price of these options were fixed months or more likely years earlier, and there was 0 added benefit to those who exercised them before Tuesday rather than after. To the general public this article seems to imply insider trading.

    Headline and link below (apologizes for bolding... copying the headline into my post set a font I can't sort out how to undo):

    http://www.ibtimes.com/tesla-insider-trades-top-executives-exercise-556m-worth-tsla-stock-day-company-issues-positive

    Tesla Insider Trades: Top Executives Exercise $55.6M Worth Of TSLA Stock A Day Before Company Issues Positive Guidance News On Revenue

     
  2. Causalien

    Causalien Reaper of Trolls

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    Yeah it is probably FUD.

    It is only suspiscious if they exercised, sold and the stock promptly went down on the announcement. Options pricing tracks stock price with a multiple. It is actually better to keep the options as it has a premium over the stock price.

    My guess is that it is just a few of the execs feeling iffy about the announcement and not knowing what to expect. They want the maneuverability of a stock in case it tanks.
     
  3. uselesslogin

    uselesslogin Enthusiast

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    Not only that if I were to exercise options I would want to at least sell enough stock immediately to cover tax liabilities. This is so that if the stock tanks for any reason you can still pay the taxes . So technically they would have been better off waiting until after the announcement.
     
  4. pgiralt

    pgiralt Active Member

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    What the article fails to point out is they would have made far more money if they exercised after the stock went up. Let me just give you an example using some simple numbers. Let's say an executive holds 100 options to buy Tesla at $100. Most sales are either a same day sale or exercise and hold. Typically you would at least sell enough to cover the taxes. Let's take both scenarios at a hypothetical price of $150 on the day of sale.

    1. Same day sale: The person has the right to buy 100 shares for 100 * 100 = $10,000. The price of the stock on that day is worth $150 * 100 = $15,000, so they pocket the $5,000 (and actually use some of that to pay for the taxes on that $5,000 gain).

    2. Exercise and hold: Again, the person has the right to buy 100 shares for 100 * 100 = $10,000, but they are not going to put in $10,000 of their money to do that. The stock is worth $150 that day, so you need to come up with 10,000 / 150 = 66.66 shares to cover the cost of "buying" 100 shares. In other words, they sell 66.66 shares and keep the remaining 33.33 shares valued at $150 a piece (so they now own $5000 of stock instead of getting $5000 in cash). In reality, you probably sell a few more to cover the taxes too and are left with less.

    In the exercise and hold case, let's say the stock goes up to $200 the next day. Now you have 33.33 shares each worth $200, so you have $6666 worth of stock that you can sell that day and get that money.

    Now let's take the case of exercise and hold, but they waited for the stock to be $200 before exercising the options (so they waited for after the announcement). Again, the person has the right to buy 100 shares for 100 * 100 = $10,000 but on this day they are valued at $200, so they only need to sell 50 shares worth (50 * $200) to cover the cost of buying. That means that they end up with $10,000 worth of stock on this day instead of $6666 if they would have exercised previously and held the stock.

    Also, it's very likely that these sales were put in well in advance as officers are typically only allowed to trade on very specific days and must put their trades in long before that date precisely to make sure they are not trading based on insider information.
     
  5. SteveG3

    SteveG3 Active Member

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    While the fuddish headline still comes up at the top of a google search, clicking on the link I get a page that simply says "access denied."

    with nearly 40% of the float short, it really looks like it was "anything goes" for some shorts to pause the Tesla tsunami and get out of their position.
     
  6. sleepyhead

    sleepyhead Active Member

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    I don't have time to read the article or even posts in this thread, but there could be tax reasons for exercising early if you knew that the stock will go up:

    E.g. say that the options had a $0 strike and cost basis. Upon exercise at $140, you pay taxes on $140 of gains. That $140 is the cost basis for your shares which you can now hold to $1000 and then pay LTCG for $860.

    If you exercised today at $170 instead then you would have to pay taxes today on $170 of gains instead of $140.

    Just food for thought, but I think that anyone who doesn't understand tax implications should not be commenting on this story. Note: I have a couple of accounting degrees and I am not even sure if what I wrote is correct. But even if it is correct, then there are many different tax elections that you can make when you are granted these options, so everyone's tax situation could be different.

    Planning for taxes is extremely complex and there could be tax reasons to exercise early.
     
  7. SteveG3

    SteveG3 Active Member

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    sleepyhead, appreciate your contributions, but I think you are giving the author way to much credit. As you say you have an accounting degree and are not sure. The author did not even mention tax consequences, and I strongly doubt he has an accounting degree, let alone spent that time you suggest would be needed to determine if it was a benefit. The article was written for a general audience, with no mention of tax consequences... anyone genuinely looking at with a level of expertise to determine tax consequences would be aware that this has nothing to do with getting a cheaper purchase price on the shares and that a general audience would need this very clearly spelled out to understand this. As it was written, it's general readership would think... "these guys got in at $140 and now it's $170... Insiders!"

    what's more, given that the article now shows up as a page reading "access denied", it seems very probable someone at IBT is having doubts about being associated with the article as it was originally written.
     
  8. kenliles

    kenliles Active Member

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    That matches my experience as well, so that could be a factor. Remember the options are largely for compensation and coming up with the money to cover taxes on these is often an important issue for the holder. Good to point that out sleepy
     
  9. ggr

    ggr Roadster R80 537, SigS P85 29

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    I agree with this logic, but there's also the possible downside that cost a friend his house back in 2001. You look around, and everything internet is going up. You work at one of those companies (in his case QCOM) and decide to exercise your options and hold the stock for exactly the long term capital gains as you say. Except it didn't go up, it went down when the bubble burst, and he didn't have enough to pay his tax bill on April 15, 2001. He wasn't the only one...
     
  10. pgiralt

    pgiralt Active Member

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    Regardless of tax consequence, it's always better to exercise at a higher price. The question becomes whether you hold them or do a same day sale - that does indeed have tax consequences depending on whether they are NQ or ISO options, but regardless, it's always better to exercise higher with the potential caveat that you might want to exercise before the end of year or right after the new year to change which year you pay those taxes, but in this case, both sales would have been in the same year anyway, so that's not a factor.
     
  11. sleepyhead

    sleepyhead Active Member

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    I agree that there is possible downside, and I have heard of stories like this one before. But if you acted on inside information, then it is still illegal, even though it may cost you big in the future.
     
  12. Robert.Boston

    Robert.Boston Model S VIN P01536

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    @ggr: That story hurts. Your friend would have been wise to invest in some puts, but hindsight is always 20/20.
     
  13. SteveG3

    SteveG3 Active Member

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    Sleepyhead, having thought about it more... isn't your point really an extremely small and could be a cost as well as a benefit in exercising?

    Either you pay taxes on $140 cap gains Monday (most likely long term gains on options) and set your cost basis going forward at $140, or you pay cap gains today at $170 today and set your cost basis at $170 going forward. The only possible advantage (if stock goes up) or disadvantage (if stock goes down) is the time value of money paying taxes at a later date vs. today on your increased or decreased taxes on that $30 price move. NOT the $30 price differential, NOT the taxes on the $30 price differential, but the potential time value of money on the taxes you might defer paying on that $30 differential IF you are right and the stock goes up.

    I just find it implausible that this was the basis of the IBT article.
     
  14. sleepyhead

    sleepyhead Active Member

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    Like I said, I don't really have time to read the article or to debate; therefore, what I wrote in this thread could be completely wrong. But the point I am trying to make is that taxes are extremely complex and there is a lot more to it than you might think. Lets look at what you wrote:

    "most likely long term gains on options" - I could be wrong, but I disagree and would say that most likely these options are taxed at short-term capital gains (or as ordinary income) even if you held them for 10 years. This topic is very complex and I don't want to debate it because I don't fully understand it.

    You can hold those options to $1000 and then pay 50% taxes on that or you can exercise today and pay 50% taxes on $140 and then let the rest grow into LTCG.

    Employee stock option taxation is extremely complex. We can debate it all day long, and we will both be wrong in our assumptions.
     
  15. SteveG3

    SteveG3 Active Member

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    Very good sleepyhead. My opinion is that this article showed up as FUD- that is, it did not show up because someone at IBT dug into these tax issues... they do not mention tax issues in the article. My opinion is that the article was written to imply that Tesla insiders made $30/share this week because they are insiders, which is simply not true.

    It is just my opinion, I did put a ? at the end of the heading of this thread, I did begin my first post with the qualification "unless I'm really misunderstanding how options work", so I don't know that it was FUD. Given recent coverage in the media, I wanted to put up this thread and my opinion. Of course, you are entitled to your opinion as well. And you are right, I don't know all the tax implications... what you wrote about the exercising not necessarily being a long term gain may be right. Good point.
     
  16. ggr

    ggr Roadster R80 537, SigS P85 29

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    Indeed, but he wasn't a sophisticated investor. Neither was I at the time...

    - - - Updated - - -

    He was just a sysadmin, giddy from having employee options in Nasdaq's biggest stock the year before. He wasn't acting on inside information, just trying to take advantage of long term capital gains, as you yourself discussed.
     
  17. Doug_G

    Doug_G Lead Moderator

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    Looks like the article was retracted and replaced with:

    Top Tesla Motors Executives Granted 385K Of TSLA Stock Options; Value Of Those Shares Increased $12 Million In Three Days

     
  18. sleepyhead

    sleepyhead Active Member

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    I didn't mean your friend, but the Tesla Execs if they did this with inside info.

    - - - Updated - - -

    Now that is bad.
     
  19. ggr

    ggr Roadster R80 537, SigS P85 29

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    Sorry for my misunderstanding. Yes, Tesla execs actually exercising (which it turns out they didn't) would potentially and probably be insider trading.
     
  20. voidptr

    voidptr Member

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    Virtually every publicly traded company prohibits employees from bying puts, selling calls, or otherwise being short. There's no exception for just protecting shares you own.
     

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