Ron, "And I think you're confused about who is confused."
Elmo is a perpetually confused man. Three years ago he
posted the following revelation about his understanding
of option accounting:
Message 16833577
Apparently, the monthly habit of purchasing shares
and trading options has an unbearable complexity for
him.
Let me try to simplify Elmo's example. Suppose he has 100 shares of XYZ he
bought 5 years ago for @10, and 100 XYZ he bought 2 years ago for @30.
Let say today he has $1000 in cash and all these 200 shares, and the market
values them at $50. His net worth is 200*$50+$1000=$11,000.
Now, two years ago he hired a man to paint his door, and he agrees
to pay him for this job by an option to buy 20 shares of XYZ after two years
of service at a fixed price of $30 (as a FMV at the day of contract),
and do whatever he wishes with the stock
(with additional condition that he must periodically check out the door paint
for two years, and if he fails to obey this, the deal is off).
Today the guy shows up, requests his 20 shares, gives Elmo $600, and
sells them the same day for their market value of $1000 profiting $400
as a payoff for his paint job.
What does it leave for Elmo? He has now $1600 in cash, but only 180 shares,
total @50*180 = $9,000, plus cash = $10,600, so his net
worth is down by $400.
Does it matter which shares did he sell? Hell no - from the market
perspective, today they all have the same valuation at @50.
If he feels more comfortable to keep the same pool of shares,
he can go to the market and fill up the deficit of 20 shares, but
he has to pay $1000 for those. As result, his worth will be
still $10,600. Funny, since he would buy the shares
about same day, how does he know that those 20 shares are
not the same as just sold by his worker? Equivalently, he
could just pay the worker $400 straight, and save on
broker fee:-)
So, at the end of day, by fulfilling his previous
obligations, his net cost for the paint job is $400.
Now, to make his construction more absurd, he can say that he sold to
the guy the 5-years-old shares (then a $200 value), and even made a
profit of $400, while in fact he lost $400 on the transaction. I'd
like to see his explanations for the paradox :-) :-)
Take care,
- Ali |
