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Technology Stocks : Wind River going up, up, up! -- Ignore unavailable to you. Want to Upgrade?

To: the hube who wrote (3469)	7/24/1998 2:53:00 PM
From: Mark Brophy	Read Replies (2) \| Respond to of 10309

Re: Your analysis It would be well worth your time to find an explanation of B-S on the net because your calculations are drastically wrong. If the stock price and exercise price of the option is 36, the employee controls 537 shares (t = 4 years, volatility = 60%, interest rate = 6%, time = 4 years). If the stock price doubles and his marginal tax rate is 40%, the after tax profit on his $10,000 investment is $13,198, not the $2000 that you quoted (or the $600 for the speculator without options). The analysis above is valid if the employee is an executive for Sun Microsystems or any other company where options must be exercised in 4 years. However, Wind River and many other technology companies permit the employee to exercise in 10 years. In this case, $10,000 of options will control 369 shares and the after tax profit is $5941. The IRS wins either way. They collect $15,466 on the profit of 537 options or $10,627 on the profit of 369 options. Use the IRS as a "sanity check". If you ever perform any kind of analysis and reach the conclusion that the IRS loses, there's likely to be something wrong and you should check your figures. The IRS nearly always wins! They're your silent partner and their fate is tied to your fate. There's another possible problem with your analysis. You seem to be assuming that the 537 or 369 shares that the company purchases at the time of the option grant offsets the option sale. In reality, the company incurs no liability unless and until the option is exercisable and the stock price is greater than the strike price. If the stock price goes down, the employee has limited his possible loss to $10,000 plus 4 years of interest. The company could lose $13,284 for 369 shares or $19,332 for 537 shares, plus the loss of income of 6%/year investing in T-bills ($2,625) rather than speculating in the stock market. Since the potential loss to the company ($19,332+$2,625) is nearly double the potential loss to the employee ($10,000+$2,625), a prudent company will not purchase shares at the time options are granted. Wind River is doing so and they're telling you that they believe the stock is currently undervalued. They also granted boatloads of options without "offsetting" purchases and sold millions of shares in 1996 when the price was 18. They were drastically wrong the last time they speculated in the stock market and lost many millions of dollars, so do you think they're right this time?