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Technology Stocks : Intel Corporation (INTC) -- Ignore unavailable to you. Want to Upgrade?

To: rkral who wrote (178417)	6/26/2004 10:45:45 PM
From: Lizzie Tudor	Read Replies (1) \| Respond to of 186894

the problem is that most opportunity costs are not recognized on the P&L, in fact I can't think of a single one that IS, although I am sure there are some out there somewhere. I deal with opportunity costs all the time in supply chain transactions. If you buy at a discount on volume, and then your volume dries up at some later date, you don't expense the "opportunity cost" that you lost because the circumstances change.

To: rkral who wrote (178417)	6/27/2004 1:06:42 PM
From: Ali Chen	Read Replies (2) \| Respond to of 186894

"you are treating an opportunity lost -- an opportunity cost -- as a loss" No, I am not treating this as an opportunity cost, because the subject is stock options and their relationship with stock buybacks. It is you guys who brought the regular option gambling to the table, and now talking about "ABC opportunities", buy-write calls, caps, etc. The company option plans are nothing like the above. It doesn't look like Elmo ever had or exercised any company options, so let me explain this to him, especially when you brought up the IRS rules. Again, you receive an option grant for, say, 100 shares @ $20 exercise price, with vesting period of, say, 3 years (as you might know, the vesting is usually spanned over few years, say 25% of shares per year). When the time comes and the options are "in the money", you decided to exercise the option, typically using "same-day sale", or "cacheless exercise". Which means that you notify your company of the intent to exercise, and you notify your designated broker of your intent to sell. The broker will contact your company, and the company will effectively SELL your 100 shares to the broker AT CURRENT MARKET VALUE, say $30. I say "effectively" because no money was transferred yet, but for IRS this transaction is recorded at a cost basis equal to CURRENT MARKET VALUE. The broker will then sell this chunk of shares, maybe in fractions, the very same day, and likely at slightly different fluctuating prices. However, due to additional agreement between the broker and the company with regard to options, the broker transfers only 100*20 = $2000 (precisely) back to your company, and the difference (minus broker's fees) is yours. Note again, that the whole transaction goes at FMV and you need to sign a margin account agreement with your broker for the full amount of the transaction, and even pay some (relatively small) margins fee for this short-lived event, you need to borrow the money for the WHOLE transaction. Since the sell price is usually not much different from the original base price, the broker's transaction is almost tax-free for you, or maybe even at small loss. However, your company will record the difference as your compensation in the W-2 form, that's where you enjoy to pay your full taxes. That's it. Now, as we observe from the above procedures, the company sells NORMAL shares to the broker, as it is all initiated at FMV as per IRS records. But the company takes a loss due to options agreement with you. Also, the company attributes this difference directly to your salary, which is another plain indication that it is a labor expense. As we see, the company shares are just regular shares, no caps, no craps, and no "buy-writes" happen at the time of option grant. I hope this clears the issue. Cheers, - Ali