Hello there,

it is a strange coincidence : i have also planned to cancell my enrollement to IBM ESPP after this month.

and i am intending to sell each month the same number of shares that i was buying (or the same amount...)

since i have been participating for the last 6 years... i guess it will take me 6 years to sell everything..

Posted by yohann | June 18, 2008 8:32 AM

I think that you are doing it wrong. Admittedly I don't know all the details of the espp, but in general you should always get the discounted stock and sell as soon as possible. In your case it appears you have it backwards. If you buy each share in espp at 95% of market and sell a share you hold at 100% of market, you have the same number of shares and you just banked 5% - free money. If you keep doing this simultaneously you are always able to capture that discount.

Let me know if there are terms in the plan that keep this from working as i've suggested.

Cheers,
ETF

Posted by ETFnerd | June 18, 2008 9:04 AM

ETFnerd,
Yes your participation in the plan is suspended if you sell your shares within the 6 month period. Also if I recall correctly you are taxed at ordinary income rates on shares you hold less than 2 years.

Posted by 2million | June 18, 2008 10:48 AM

Yes, that's why you should buy at 95% of FV in the ESPP, hold these for at least a year, but simultaneously sell the same number of shares in IBM holdings that you've had for over 1 yr to get the cap gains treatment. That way you get the best of both worlds.

Posted by ETFnerd | June 18, 2008 11:51 AM

To clarify, you are selling other IBM shares in your portfolio that have seasoned the 1 year holding period for cap gains treatment. You appear to have plenty.

Posted by ETFnerd | June 18, 2008 11:55 AM

2Mil,
You should have ditched the plan when it changed. The 5% discount is close to a one-day swing. Why force yourself to buy on a specific day at some arbitrary price (avg of hi-low, close of mkt, something else). If you believe the price is undervalued, better to purchase with a limit order.
I also remember you discussing the ESPP broker who charged way more than a good discount broker to execute trades.

DD

Posted by dd lang | June 18, 2008 12:13 PM

I agree with both you and Yohann's decision to opt out of the ESPP, but the disciplined sell strategy just seems plain wrong if you don't see the stock doing ok over the next year or two. Why blindly follow a plan that doesn't take into account market conditions or company performance? The gospel being preached by the current crop of financial planners will destroy our retirement savings with low returns.

Posted by Chad @ Sentient Money | June 18, 2008 4:00 PM

Are you buying more / holding Wachovia? Stock is down 25% since your last update on June 1. Possibly more dividend cuts in the near future. What are your thoughts here?

Posted by Shmorge | June 18, 2008 5:32 PM

ETFnerd,
There is also a 2yr stipulation on getting the favorable capital gains tax rate- I think its 2yrs from grant date. I have been treating all ESPP stock as 2 yr hold to get tax rate since I don't know/track the grant dates on the shares.

I also agree that I could do that to benefit from the 5% discount. Right now I am hesitant because I don't see much upside -- I am planning on sell off more of my IBM holdings - not maintaining the level of investment I have now.

I will revisit your idea if IBM becomes a more attractive investment to me.

Posted by 2million | June 18, 2008 10:33 PM

I disagree with DD and Chad.

There is clearly a riskless arbitrage opportunity here. The payoff is 5% minus transaction costs by simultaniously buying the ESPP shares at a discount and selling the same number of seasoned shares from your holdings.

This profit is derived regardless of daily volatility, short term or long term outlook on the price of the shares.

If you don't do it you are leaving free money on the table. The only reason to not do this is if the transaction costs exceed the discount.

ETF

Posted by ETFnerd | June 19, 2008 9:55 AM

@ ETF

That's not riskless.

Example:

Sell old IBM stock for 20% gain at $125.
Buy new IBM stock at 5% discount for $118.75 and sell it 6 months later at $87.50 (30% below $125).

You lost roughly $6.25 per share (actually you lost more because you lost the profit from the original sale because you had to hold for 6 months). There is risk. The 5% off reduces risk, but by no means eliminates it.

If you wanted to hold onto the IBM shares this would be a good idea, but they don't want to, that's why they are getting out of the plan.

The example below is the more traditional example of arbitrage:

Buy IBM stock at 5% discount from internal corporate market and immediately sell it on NYSE for the 5% difference. There still is risk, even in this transaction, because the NYSE transaction won't be instantaneous and the price can fluctuate.

Posted by Chad @ Sentient Money | June 19, 2008 1:48 PM

I agree with Chad. Buying IBM shares at the current price with 5% discount is very high risk. Actually I cancelled mine few months ago. I think IBM stock is overrated right now due to all the buybacks IBM is doing. IBM's offered price for ESPP is based on the lowest of the 2-week paid period minus 5% which is not a very good deal at all. Intel's ESPP is based on the lowest of the 6 month period minus 15% and you can do quick sale on the same day you purchase your shares. In that case, it's for sure a riskless gain with at least 15% profit.

Posted by Bella | June 20, 2008 1:30 PM

This always comes up in discussions at work on ESPP participation and when to sell. I'm not active enough to take the time and sell when I get it. I don't want to worry about all the taxes applied to these purchases. So now I'm top heavy with company stock even though it's made "some" money. I could have made a lot more just investing wisely in other companies.

I'm dropping ESPP to help pay for a mortgage and build up a down payment as well. It seems you have thought through your decision and made the right one for you (not necessarily for your readers).

Posted by thomas | June 21, 2008 2:54 PM

Chad said:

"The example below is the more traditional example of arbitrage:

Buy IBM stock at 5% discount from internal corporate market and immediately sell it on NYSE for the 5% difference. There still is risk, even in this transaction, because the NYSE transaction won't be instantaneous and the price can fluctuate."

So if you put in the orders, one a few seconds after the other, the difference in price will be more than 5%? I don't think so. If this ever happens to you in a liquid stock like IBM, then you should seek a different broker.

I clearly stated that the transanctions should be simultaneous and that 2mil should sell seasoned stock to minimize the tax exposure.

What you are laying out makes no sense. As long as 2 mil's cost (transaction + tax difference) is less than 5% he should participate in ESPP and get the discount.

Posted by ETFnerd | June 23, 2008 9:53 AM

I agree, no riskless arbitrage here, otherwise I would be all in. In my mind, ESPP plans that offer a 15% discount have an arbitrage play because of the 15% buffer from buying to turnind around and selling.

I will only participate in my employer's ESPP going forward when I feeling the stock is a compelling investment.

Posted by 2million | June 26, 2008 2:05 AM