Investment Strategies Flashcards

An employee holds ISOs and is considering exercising them. Which of the following is a key tax planning consideration specific to ISOs?

Answer: The spread at exercise may trigger the Alternative Minimum Tax (AMT)

ISO exercises can trigger AMT because the bargain element (spread) is an AMT preference item, even though it is not recognized as regular income at exercise.

Which strategy allows an employee to exercise stock options and immediately sell enough shares to cover the total exercise cost and taxes?

Answer: Same-day sale (cashless exercise)

A same-day sale, or cashless exercise, allows the employee to exercise and simultaneously sell shares, using the proceeds to cover exercise costs and taxes without needing upfront cash.

What is the primary risk of concentrating a large portion of one's investment portfolio in employer stock?

Answer: Lack of diversification increases exposure to company-specific risk

Holding concentrated employer stock subjects an employee to both human capital risk (job loss) and financial capital risk from the same source, violating basic diversification principles.

Under a '10b5-1 plan,' what protection does a corporate insider gain?

Answer: An affirmative defense against insider trading claims when trades are pre-scheduled

A Rule 10b5-1 plan allows insiders to pre-schedule trades when they are not aware of material non-public information, providing an affirmative defense against insider trading allegations.

A participant receives RSUs and wants to minimize tax liability at vesting. Which strategy could defer taxation if permitted by the plan?

Answer: Enrolling in a non-qualified deferred compensation (NQDC) arrangement

If the equity plan permits, deferring RSU settlement into a NQDC plan can postpone ordinary income recognition until the elected distribution date.

Which of the following best describes a 'protective put' strategy for an employee holding vested company shares?

Answer: Buying put options on employer stock to limit downside while maintaining upside

A protective put involves purchasing put options on shares already held, setting a floor on losses while allowing participation in further price appreciation.

When evaluating whether to hold or sell shares acquired through an ESPP, which factor most directly determines whether the sale qualifies as a qualifying disposition?

Answer: The holding period relative to the offering date and grant date

A qualifying ESPP disposition requires holding shares for more than two years from the offering date AND more than one year from the purchase date; violating either threshold results in a disqualifying disposition.