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Strategies & Market Trends : Employee Stock Options - NQSOs & ISOs
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To: rkral who wrote (709)9/19/2004 11:26:26 AM
From: Don LloydRead Replies (1) of 786
 
Ron,

In brief:

Comparability of companies is improved by expensing all employee compensation ... including fixed employee stock options.

The option value -- like the premium on publicly traded option exchanges -- is based, in part, on the price volatility of the underlying stock.

All else being equal, a call option writer demands a higher premium when the volatility is greater ... to compensate for the increased risk of holding the underlying.

Simple as 1 .. 2 .. 3 .. almost.

The question is not whether the value of options should depend on volatility, but whether it makes any sense at all for an increased volatility to be reflected in a reduction in reported earnings, which is the result of expensing options.

If a $10 stock falls to $5, the option grants have resulted in no negative result for either the company business or the shareholders as the employees have had their compensation voided with their options becoming worthless.

If a $10 stock rises to $20, the option grants have not resulted in any negative for the company business. The shareholders only suffer the same kind of injury that would occur if they had sold their shares early at $18 on the way to $20.

The unintended consequence of stock or option expensing is to create an expense that has the incredible characteristic of being better for shareholders the larger it is as the stock price increases.

Regards, Don
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