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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Michael Bakunin who wrote (82962)	8/15/2000 4:23:43 AM
From: Don Lloyd	Respond to of 132070

mb - [You know I disagree with you, so I have been staying out. To encapsulate my point, however: all costs are opportunity costs. Options have value in a liquid market; the cost of gifting them approximates the value of similar options in such a market. The opportunity that the company forgoes is selling the same options into the market and paying its employees in cash.] You're supposed to find fault with my proof, not drive me back to economic theory and analogies. -g- Your statement is 99% correct, but the 1% makes all the difference. Let's say I am a counterfeiter who can make perfect $100 bills. If I use one of my counterfeit bills to light a cigar, what is my opportunity cost for lighting the cigar? Answer, it depends. There is a liquid market for my counterfeit bills and their market value is $100, although their purchasing power depends on the actions of a certain larger scale counterfeiter. If my printing press is permanently broken, then the opportunity cost is $100, unless my existing stock of bills is so large that the time it would take to pass the last one into circulation is far enough into the future that the discounted present value is significantly below $100, which it clearly might be. If my printing press is fully functional, and is able to produce bills faster than they can be passed into circulation, then the opportunity cost is merely the production cost, a far lower number. In the case of options, their production cost is essentially zero, which is also their opportunity cost unless they cannot be generated at least as fast as they are actually sold into the market. Since the options dilute the shareholders, and the market liquidity is not infinite, there is some limit to option sales which will occur when the next option sold produces a negative return to the shareholders. This limit will likely be easily small enough so that the production rate of options will not be a limiting factor and the opportunity cost will approximate zero. That said, I don't have a great deal of faith in that argument being bulletproof, as I've generated it on the fly early in the morning, but I do think the conclusion is likely correct. Please attack the proof as stated. Thanks, Don

To: Michael Bakunin who wrote (82962)	8/15/2000 7:47:02 PM
From: TimF	Respond to of 132070

To encapsulate my point, however: all costs are opportunity costs. Options have value in a liquid market; the cost of gifting them approximates the value of similar options in such a market. The opportunity that the company forgoes is selling the same options into the market and paying its employees in cash. I imagine if a company sold a large amount of naked calls against its stock it would be seen as a sign of lack of confidence in the stock price by management and would drive the price down more then just the effect of the dilution. Tim