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Technology Stocks : Advanced Micro Devices - Moderated (AMD) -- Ignore unavailable to you. Want to Upgrade?

To: Robohogs who wrote (80077)	5/15/2002 3:17:53 PM
From: Petz	Read Replies (2) \| Respond to of 275872

ISO option valuation - Jonathan, since they are so long term, I think the valuation for an option approaches the current stock price for any stock with fairly large volatility. An extremely volatile stock doesn't change the valuation that much. I'm assuming most options expire in 15 years. That is such a long time period that almost any reasonably volatile stock has a >33% probability of being worth 3x it's current price. The key thing is that an option can never be worth more than the current price of the stock when it is granted. The ratio of an options value to the current stock price, r, is always between 0 and 1. Actually, if it can't be exercised for x years, I think the max value for r would be (1-i)*x, where i is the interest rate. Does that make sense? But if r above 0.5, as I suspect it is, then it would mean that AMD's charge to earnings for granting options on a million shares of stock would be more than the charge to earnings if they outright gave* 500,000 shares of stock to employees. Employees might like that, but employers prefer ISO's which provide more incentive to increase the stock price. The IRS does not even try to value the option - they give a corp. a deduction for the amount the option is in the money the day of exercise. Didn't realize that. For a company that has been around a long time and generally had a continually rising stock price, the charge to earnings using that approach would be much higher than the S&P number. Not sure which approach I like better. Petz