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

To: Exacctnt who wrote (192)	8/16/2002 10:15:29 AM
From: rkral	Respond to of 786

Exacctnt, adding grant price and fair value price .. The problem with that calculation and the problem with SFAS 123 and Black Scholes is that the year 2000 grant assumes that within 4.2 years, from the time of issuance, the market price of ELON shares will reach $60.83. ($33.63 grant price plus $27.20 fair value price). Had to think about that one .. before I agreed. For others who may have similar difficulty, my explanation to myself follows: The option game is a "zero-sum" game. When buying a call option, the buyer's expectation is (if it isn't, it should be) simply the return of the call premium. Similarly, the covered call-writer's expectation is simply the loss of the call premium received for writing the call. The net expectation is ZERO. (Ignoring commissions here. And the net expectation is not really zero. In the derivation of the Black-Scholes formula, the time-cost of money is earned by the covered call writer .. and paid by the call buyer, of course.) One way for a call buyer to obtain the return of the call premium is .. to exercise the call option .. and sell the stock for the sum of the strike (grant or exercise) price and the option premium (fair value price). Arguably, the employee doesn't actually pay the option premium in the NQSO case, however. Ron

To: Exacctnt who wrote (192)	8/16/2002 11:38:25 AM
From: Ted The Technician	Read Replies (1) \| Respond to of 786

>> SFAS 123 does not allow any adjustments to the original calculation to reflect market price swings Looks like SFAS 123 needs to be changed to reflect market price swings. It will be more difficult to do quarter-to-quarter comparisons with price-sensitive option grant expenses being buried within the income statement. It might be better to first do a fundamental analysis without the option grant expenses. The fundamental value of the company would then be discounted by the current quarter's option grant expenses and by the impact of exercisable options at the various strike prices. Do the previous quarters' option grant expenses really matter?

To: Exacctnt who wrote (192)	8/18/2002 10:09:51 PM
From: LLCF	Read Replies (1) \| Respond to of 786

<The problem with that calculation and the problem with SFAS 123 and Black Scholes is that the year 2000 grant assumes that within 4.2 years, from the time of issuance, the market price of ELON shares will reach $60.83. ($33.63 grant price plus $27.20 fair value price).> That MAY be the assumption of SFAS 123, but that is NOT the assumption of BS. BS values the options based on the 'expected value' at expiration, it does NOT assume the stock will close there anymore than a casiono expects the ball of a roulette wheel to split into 36 pieces and each piece land on a different number. <The price of ELON's shares has tanked since the year 2000 grant, however, SFAS 123 does not allow any adjustments to the original calculation to reflect market price swings. > Then clearly SFAS 123 is lacking... but that DOESNT mean fagetaboutit as far as expensing options... if they "just do it".. they'll revise it [companies will demand it]. Of get it right right away. This is real interesting in that it shows how many people don't know beans about options. It shouldn't be that tough to expense an options grant. dAK