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Strategies & Market Trends : Employee Stock Options - NQSOs & ISOs -- Ignore unavailable to you. Want to Upgrade?

To: hueyone who wrote (189)	8/15/2002 5:55:39 PM
From: Ted The Technician	Read Replies (3) \| Respond to of 786

Huey, your footprints led me here. I'm a believer that option grants should be expensed, especially when looking at the current 10Q. It helps in determining a company's true margins. I think the issue of how employee options affect a company's fundamental value goes beyond whether option grants are expensed. I see companies reducing the number of diluted shares, apparently because expiring out-of-the-money options are causing and anti-dilution effect. If options are expensed at the time of grant, should there be a corresponding windfall when options expire out-of-the-money? Should I be now buying companies that had huge option grant expenses knowing that these options will not be exercised ? And watch out for companies repricing those options! Modeling the effect of options on a stock's fundamental value is difficult because of the multiple option packages and strike prices. It is not a simple linear equation. Looking at the extreme cases, let's assume that a company issues an infinite amount of options with strike price of $10. If the share price goes above $10, that stock will be worth nothing to existing shareholders as any earnings would be diluted to zero. If the stock price stays under $10, the options expire worthlessly and existing shareholders' interests are maintained. There are other not-so-extreme cases. Let's now assume that a company issues a significant amount of options. If the options are exercised, the company would receive cash assuming it issues treasury stock to the employee. This cash could be critical to the company that has huge debts and good for existing shareholders (bookvalue per share increases); otherwise, it just dilutes shareholder interests. ELON has very nice margins and makes a profit, but only because of those options. Including option grant expenses, its margins disappear and there is no profit. Now with its stock price having dropped below many of the option strike prices, should I view the past margins as having been real since out-of-the money expired options does not cost the company anything? But once the stock rises above the strike prices, the margins disappear once again as the cost to the company to option is included. ELON includes a negative line item named "deferred compensation" within the shareholder equity portion of the balance sheet to account for the amortization of option expenses. Shouldn't this be categorized under the liabilities section? Also, someone mentioned in an earlier post that one could go into the 10k to get a good estimate of the option grant expenses for the current quarter (divide last yr's expense by four). Isn't the value of option grants usually a function of market cap and not a budgeted dollar amount?