Beriss says that despite the recent bear market that left many option holders with deflated investments and huge tax bills, overconfidence in a company and its stock remains an obstacle to diversification. But, he adds, "clients seem to be more open to moving in that direction than they used to be."

Any options planning must also take into account tax considerations. Tax treatment at various points in the options life cycle will depend on the kind of stock options someone has. You can usually find this information in plan documents.

With nonqualified stock options, taxes usually bite into profits at two points. When the owner exercises the option, the difference between the market value and the lower strike price is treated as compensation income on that year's tax return. Once the stock is sold, the cost basis for tax purposes is the market price on the day the option is exercised. Gains on stock held for more than one year after the exercise date are taxable at long-term capital gains rates. The major tax glitch with nonqualified stock options is that many companies withhold at the statutory rate of 25% at exercise, even if someone is in a higher tax federal bracket. Clients who have not had enough withheld from their options check face a large, unexpected tax bill down the road.

Incentive stock options (ISOs) work differently. At exercise, the difference between the market value and the strike price is generally not taxable. When the stock is sold, the tax is based on the difference between the strike price and the price at the time of the sale. This amount is eligible for favorable long-term capital gains tax treatment if the shares are held for more than a year, and if the sale occurs more than two years after the option grant date. Because it is possible for the entire profit on ISOs to receive favorable tax treatment, they are usually considered more desirable than nonqualified stock options.

However, ISO owners face the alternative minimum tax. Although regular income taxes are not due at exercise, as they are with nonqualified options, the difference between the strike price and the exercise price is treated as income for the purpose of calculating the alternative minimum tax. Depending on individual circumstances, and with the help of a tax professional familiar with options planning, it may be possible to take some of the bite out of the AMT.

Stock Option Resources

Fairmark Press (www.fairmark.com). Tax attorney and author Kaye Thomas offers easy-to-digest explanations about how employee stock options work and outlines the tax implications associated with them. Thomas also founded the National Board of Certified Option Advisors (www.nbcoa.com), a new options certification program for financial advisors.

National Center For Employee Ownership (www.nceo.org). The Web site of this 23-year-old non-profit organization contains useful articles about stock options, stock purchase plans, ESOPs and other equity-based compensation.

MyStockOptions (www.mystockoptions.com). The site has free option calculators as well as articles by financial advisors, tax attorneys and other professionals specializing in stock options.

Net Worth Strategies (www.networthstrategies.com). Offers stock option consultation services and software for financial advisors.