March 30, 2015
Hedging by writing exchange traded calls and buying exchange traded puts while holding employee stock options and SARs is the only efficient way to manage the risks of such holdings.
Discouraging or prohibiting such use of the only efficient strategy makes the grants less valuable and requires larger grants to achieve the same alignment with the share holders.
If hedging is discouraged, the only method for risk reducing is to make premature exercises and sell the stock which eliminates the alignment between the shareholders and the grantees. Premature exercises has severe penalties to the grantees in the form of forfeited "time value" back to the issuer and early ordinary income taxes.
Early exercises sales and diversifying the net proceeds after the penalties is considered is imprudent and essentially is a violation of the fiduciary duties to advise such a strategy. See the link below:
https://docs.google.com/presentation/d/1Ce7GIic2v9gNz3AUu25jxtUjyBFFi3LpKKEBCfwoQGs/edit#slide=id.g250ee3c0_0_5