The Best of Kass

Tickers in this article: FB GS LOPE
NEW YORK ( TheStreet) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.

Among his posts this past week, Kass explained how you should interpret insider selling, why he's shorting Goldman Sachs (again) and why Facebook has "sell" written all over it.

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When Insider Selling Matters
Originally published on Thursday, Feb. 28 at 12:25 p.m. EST.

  • If an exec cashes in five years before his option expires, that's a red flag.

One question I get a lot from subscribers is, how should insider selling be interpreted, and when should we consider insider selling as an important factor in our investment decisions?

Most insider sales are either outright share sales, 10b5 programs or the exercise of options (and subsequent sale of stock).

Obviously, outright, unscheduled insider sales are always a red flag, though there are often good reasons for such sales (diversification, estate planning, change in family status, etc.).

A majority of insider selling today is through planned 10b5 programs.

The plan must:

  1. Specify the amount, price (which may include a limit price) and specific dates of purchases or sales, or
  2. Include a formula or similar method for determining amount, price and date, or
  3. Give the broker the exclusive right to determine whether, how and when to make purchases and sales, as long as the broker does so without being aware of material, nonpublic information at the time the trades are made.

Given the design and structure of 10b5 programs, they are rarely a signal of concern.

But another, less obvious red flag is generated on the execution of options and immediate sale of stock. This occurs not at all times but clearly when an executive exercises options and sells stock well in advance of the scheduled expiration of the option. After all, if one has confidence in a business, why not wait and allow a company to flourish and grow?

A good case in point (one in which a red flag is raised), is this recent transaction by an insider who exercised options and sold Grand Canyon Education (LOPE) shares last week.

In this transaction, we can see an insider sale in February in which one of LOPE's executives has exercised options on three separate lots (of 50,000, 8,717 and 12,339 shares) between Feb. 22 and Feb. 25, 2013. The shares were exercisable at $12 a share (on Nov. 19, 2009, and Nov. 19, 2010) and were sold between $25.00 and $25.50 a share.

The most important factor in evaluating this option exercise and sale is how far out into the future the options expire. In this case, the options expire well out into the future, on Nov. 18, 2018.