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Technology Stocks : Qualcomm Incorporated (QCOM)
QCOM 176.50+1.5%12:22 PM EST
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To: Peter J Hudson who wrote (114168)2/24/2002 1:42:33 PM
From: rkral  Read Replies (2) of 152472
 
stock price appreciation from the time of grant to the time of exercise, this is not a cost to the company or shareholders

Good point and I agree. But imho there is a gift to the option grantee by the company (existing shareholders) on the date of the grant. The gift is the value of the option.

The option may be valued using the CBOE calculator for American style (exercise anytime) options available at cboe.com. If we plug in the following values: equity price = ($)32.70, strike price = ($)32.70, volatility = 88(%), annual interest rate = 5(%), quarterly dividend = 0, and days until expiration = 3650, we find that the theoretical price for a call = ($)28.416. An increase in either volatility or interest rate will increase the option value. The 88% volatility used above is the current 10-day historical volatility taken from ivolatility.com.

In other words, the value of a 10-year (call) option for an exercise price equal to the stock price is 87% of the exercise price on the date of grant, for a stock with 88% annual volatility, when interest rates are 5%.

The cost of this option does not appear on the company's income or balance sheet statements .. just like John Shannon's stock appreciation between the grant and exercise dates does not.

But the option value is real. Fortunately for shareholders, it is most often much smaller than the stock appreciation number.
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