1. same-day-sale (cashless)
2. exercise-and-hold (requires cash, or requires a same-day-sale of some stock to create the cash)

The short answer to the question is that there isn't one good answer. Only a lot of views, and strategies. Pick the one the best fits your personality and outlook.

[Stuart Balfour] NQ options should be held (not exercised) until 6 months from expiration. Some time in that 6 months, you'll choose a day when you believe the stock price is at a local maximum to exercise. Calculations also show it may be statistically advantageous to exercise in 2-3 parts over that time (game theory). We may go though many complicated scenarios of exercising and holding, but in each case, any cash you use to pay strike price and tax, was better invested elsewhere.

Further reasoning (in favor of holding, from various posts):

1. You throw away the time value of your option. Time value is not speculative, it is a precisely calculable value, and is what your option would sell for in the market place if you could sell it.

2. You throw away the leverage of the option - your strike price times the number of shares is an interest free loan. When you exercise, you must pay off that loan. That money comes out of your pocket, and is no longer invested.

3. You lose 1/2 or more of your investment instantly to the tax man. HALF!! You should never want to pay the tax man early.

4. The margin interest you accumulate on the borrowed money MAY be deductible. However, it is deductible only to the extent of investment income in that year. If you are holding Cisco stock, you will have no investment income and the margin interest will not be deductible.

5. The margin rate at a full service broker is likely to be call money rate plus 2.5% - 3.0%. At todays rate, that's >10% - greater than your nominal long term rate of return. You should never margin at a rate higher than the nominal long term opportunity cost of capital. Go to a discount broker to margin (I borrow money at 6.5% at Brown&Co. Tell that to your broker.)

[Arun Paramadhathil] It can be mathematically shown that Exercise-and-hold is an unwise option. But, this doesn't mean that "to hold" is the best strategy. The meaningful ones are:

• Hold on as long as you can (limited by expiry, switch of jobs, need for cash etc), if you believe the price is monotonically going to rise.
• Sell and pocket gains, or invest in other favorable investments, if you believe that the long term prospects aren't that great. Or, if you are unsure and don't want to speculate.

[Gary Cohen] Just to stir up the hornets nest about when to sell options, I want to relate a conversation I had recently with a Cisco co-worker.

They came into my cube with a stock option dilemma.  Their new-hire grant was expiring in a few weeks, and they didn't know what approach they should take to sell the grant shares.  In addition, this money was targeted at buying a house, and the reduced value since the split was a concern.  We talked a little about different methods: buy and hold, sell it all, etc.  But my concern was how the situation got to this point.  Two words, greed and fear.

This co-worker reads cisco.invest and has heard all the "optimum" strategies for selling your Cisco options.  They knew all about the 6 month window near the end of the grant, and had made some sales in January.  Then the price ran-up, followed by the dramatic decline.  This price movement brought out the problem of trying to sell at a "local" maximum during the last 6 months of an option grant period. The problem is fear and greed.  CSCO is at $78 you want a little more, then it declines to $73, you think I'll wait just a little time and try to get $78, then it declines to $65,  but all the news is positive.  Before long you have a few weeks to go on the grant and the price is $51.

Finding the "local" maximum during the last 6 months of a grant period assumes that A) the price will probably keep going up, and B) the grantee won't try to optimize the sale.  I think most people would have great difficulty selling their most valuable option into a falling market.  Since you can't predict what the market conditions will be like during the last 6 months of your grant period there is a significant chance of getting squeezed at the end of the grant period.

The market conditions that exist now validate my option selling strategy of picking fixed price points and selling some option shares when those prices are exceeded.  This strategy eliminates the "time" variable from the selling decision, you are making decisions based on price alone.  Of course you need to set the price points such that most (or all) granted shares are sold by the end of the option, and this strategy also assumes that, in general, the price of Cisco stock will continue up.  This strategy also has the advantage of not "chasing" prices lower, you are generally selling into a rising market and can get good execution of your orders.

There is one very important psychological requirement to sell employee options using this strategy.  You can't look back.  Once the option shares are sold they are gone and won't ever come back.  In addition, I will guarantee the first day option shares are sold early (way before expiration), the price will close much higher then the sell price; and the price will probably be even higher everyday after this.  If you dwell on the missed opportunity of a higher sale price, if you regret selling those option shares, then this method will not work.

I know some folks on this list have compared employee option grants with LEAP options.  This comparison shows the supposed "value" of the option and why everyone should wait until the end of the option to sell.  The big problem with this comparison is that YOU CAN'T SELL YOUR EMPLOYEE OPTIONS ON THE OPEN MARKET.  All you can do is exercise the option and then sell the shares.  All the time value of the LEAP option doesn't exist in employee options.

A different way of viewing Cisco NQ options is as a bonus plan.  These bonuses can be awarded by you, to yourself, whenever you want (assuming they are above water). You can award yourself these bonuses by any method.  I chose to award myself whenever the price of Cisco stock exceed certain thresholds (within the constraints of the IRS).  You could chose another method, maybe when your child walks for the first time, phases of the moon, you mother-in-law moving out of the house, whatever.  However using the time on the option grant doesn't have to be a factor in this decision except in the requirement that all the grant shares be exercised before expiration.

In these days of declining tech stock prices I think everyone here should be thinking about how to maximize the value of their Cisco employee options and maybe a little different approach will work better.

[Dan Wing] If you need money for a house, car, or a huge vacation, and the only way you can get enough money is to sell stock, you should sell it. As no one can predict the market, you can't predict if you're at a local high. Selling the stock in two installments reduces your exposure to being wrong (either direction).

Cisco also permits employees to buy puts, but the 10% limit on CSCO puts imposed by Cisco is usually insufficient for first-time home buyers to make a down payment.  But it can help and prevents you from having to sell stock if you think its on its way up but you're in a time-constrained position (that is, you have to get money within the next few months no matter what and can't out-wait a bounce in CSCO's value).

If you feel any investment will go down beyond your threshold of pain, you should sell it.  The threshold of pain is different for different people: some see under-water ESPP purchases as "beyond my threshold", others average all previous stock purchases together, others average previous perchases together if they're older than a year (as shorter than a year costs more tax to sell), etc., etc.

If everyone did this the same way and there was a "right way", stocks wouldn't move around daily.  This is what creates a market.

It's important to try, as much as possible, to remove emotion from buy/sell decisions.  If you decide the stock feels high and you think you should sell, but the next day it creeps up to $74, the next day up to $76, you may decide "nah, I won't sell". But when it starts coming down to $75 you should have sold. That is $1 above the "I think it's high" -- the only difference is you're selling on the way down instead of the way up. It doesn't matter much if you sold at $74 if you sold on the way up (and kicked yourself for not waiting) or on the way down (and kicked yourself for not selling at $84).

With this impressive drop in CSCO, I am sure we all wish we had sold at $80 and bought it back again today. We'd have more shares, even after paying taxes on the sale.

Sell options when:

• you need money for another investment
• the stock price is at its peak before
(a) your option expires, or
(b) you quit working at Cisco, whichever comes first.

[Arun Paramadhathil] Consider yourself playing "Who Wants to be a Millioniare", and then ask yourself, when do you quit and pocket the winnings, vs go double or broke. As the stake goes up, so does the temptation to quit when unsure. But, what is the level at which a person quits depends purely upon the individual, and his/her knowledge on what's ahead.

Either need the links referenced or need to take them off
See Stuart's posting describing the value of options versus the share price.

See also Ronnie's post which describes his C program that calculates handcuff-value, furture value, and estimated tax.  Here is a link to an Excel spreadsheet by Andrew Clark that provides similar functions.