My Rules for Handling Stock Options, as a CFA and CFP®

Most stock option mistakes don't come from bad luck. They come from not having a plan: exercising without knowing the tax bill, holding too much company stock, or forgetting about options until it's too late.

As a CFA charterholder and CFP® professional who works with tech employees, these are the six rules I believe matter most. They won't fit every situation, but they're where I start.

Rule 1: Plan before you exercise, not after

The most expensive stock option decisions are the ones made without running the numbers first. Before any exercise, you should know three things: how much cash you need, how much tax you'll owe, and whether it triggers the alternative minimum tax (AMT).

This matters because the tax consequences are locked in the moment you exercise. With non-qualified stock options (NSOs), the spread becomes ordinary income immediately. With incentive stock options (ISOs), a large exercise can create an AMT bill on shares you haven't sold.

I'd rather spend an hour modeling a decision than spend April explaining a tax bill nobody expected. Planning also opens up options, like spreading exercises across multiple tax years, that disappear once you've acted.

Rule 2: Never let in-the-money options expire

Stock options don't last forever. Most expire 10 years after they're granted, and if you leave your job, you often have just 90 days to exercise vested options before they're gone.

An option that expires while the stock trades above your exercise price is value you earned and simply lost. It happens more often than people think, usually because someone changed jobs, got busy, or assumed they had more time.

My rule: keep a list of every grant with its expiration date, and set reminders well before each deadline. If you're considering leaving your job, review your options before you give notice, not after.

Rule 3: Cap your company stock exposure

When you work at a company and own its stock, your paycheck and your investments depend on the same outcome. If the company struggles, you could face layoffs and a falling portfolio at the same time.

My general guideline is to keep company stock at or below 10% of your net worth. That's a starting point, not a hard law. Someone with a large portfolio and a secure role may take on more; someone early in their career with most of their wealth in one stock should likely take on less.

The specific number matters less than having one. Without a cap, it's easy to keep holding because the stock has done well, and concentration quietly grows with every vest.

Rule 4: Sell on a schedule, not a feeling

Deciding when to sell company stock is emotional. When the price is rising, it feels like selling too soon. When it's falling, it feels like selling at the bottom. Either way, it's easy to do nothing.

I prefer setting a plan in advance: for example, selling a fixed portion of shares each quarter, or selling whenever your holdings exceed your cap. A schedule takes emotion out of the decision and turns diversification into a routine rather than a bet.

If you're an executive or insider with trading restrictions, a 10b5-1 plan can set up these sales ahead of time, within your company's trading rules.

Rule 5: Don't let taxes drive every decision

Taxes matter, but they shouldn't be the only factor. A common mistake is holding shares longer than you should to qualify for long-term capital gains rates, then watching the stock fall by more than the tax you were trying to save.

Here's a simple way to think about it: the gap between short-term and long-term rates can be significant, but a single-stock decline can erase that savings quickly. If holding a few extra months puts you well over your concentration cap, the risk may not be worth the tax break.

The goal is to keep the most money after taxes and after risk, not to pay the lowest possible tax.

Rule 6: Set aside cash for the tax bill

Withholding on stock option income often falls short. Employers typically withhold federal tax at a flat 22% on NSO income, but many tech professionals are in the 32%, 35%, or 37% bracket. ISO exercises usually have no withholding at all, even when they create an AMT bill.

My rule: when you exercise, estimate your actual tax and set the difference aside in cash, or make an estimated tax payment. Don't count on April to sort itself out.

This one habit prevents two problems: an unexpected bill, and being forced to sell investments at a bad time just to pay it.

The bottom line

Stock options can be one of the biggest drivers of wealth for tech professionals, but only if they're managed with intention. Plan before you act, protect what you've earned, limit your exposure to one company, and make decisions based on a strategy rather than emotion.

Get a plan for your stock options

Have stock options and not sure when to exercise, how much tax you'll owe, or how much company stock to keep? Reliant Wealth Advisory helps tech professionals build a clear plan for their equity compensation.

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About the author

Michael Walstedt, CFA, CFP®, is the founder of Reliant Wealth Advisory, a fee-only fiduciary firm in Hoboken, New Jersey. He helps tech professionals in the New York/New Jersey area, as well as nationwide, plan around stock options, RSUs, and concentrated stock positions.

This article is for educational purposes only and is not tax, legal, or investment advice. Tax rules change, and your situation may differ. Consult a qualified tax professional before acting.