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The table below illustrates the in-the-money (ITM) value of a hypothetical stock option portfolio. As you probably know, ITM value is the current stock price minus the strike or grant price times the number of
shares. This is the easiest way to value a stock option portfolio, however ITM value does not depict the potential value of these grants or provide a framework for determining when to exercise them. For these reasons we are going to
explore the concepts of time value and leverage.
In the money Value 
Time Value
The following table calculates the time values for the same set of grants using the Black Scholes formula. Time value is a theoretical measure of value based on 3 major assumptions:
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Time to expiration: more time equals more time value
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The in-the-money value: time value decreases as the ITM value increases
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Volatility of the stock: greater volatility means a higher time value
Time value plus in-the-money value equals the Black Scholes Value (BSV) for the vested and unvested portions of each grant. The relationship between time value and the Black Scholes value can be used to quantify the risk /
reward trade-offs of holding the option and is an indicator for determining when to exercise.
Calculating the time value also lets us quantify what the option-holder is giving up if they were to leave the company to go work for a competitor. We call this the "Forfeit Value®" and as you can see below it is significantly greater than
just the in-the-money value of the unvested options. By leaving the company the employee is giving up the potential (time value) in their vested options and the BSV (time value + ITM value) of their unvested grants. This can be a
significant amount that when understood, serves to maximize employee retention.
Time, Black Scholes and Forfeit Value® 
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Leverage |
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The table below illustrates the concept of leverage as it applies to our set of employee stock option grants. Starting with the current stock price of $20 the table applies positive and negative values in 20%
increments and then calculates the ITM value and the incremental change in the ITM value. The results can be astounding and are a function of the relationship between the strike prices of the grants and the current stock price. In this
example a 20% increase in stock price yields a 145% increase in ITM value. However, leverage is a two-edge sword because a 20% decrease in stock price yields negative change of 65%.
The benefit of advising employees of the leverage in their stock option position is twofold: 1) because it will serve to motivate them to achieve corporate objectives and 2) because it helps them to make timely decisions.
Leverage Table 
There are additional concepts and approaches that will enable individuals and companies to maximize the value of their equity compensation. We will continue to explore these in upcoming editions of our News Brief. In the meantime, here
are a couple of helpful resources on the topic of equity compensation planning:
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The "Financial Planning" section of
myStockOptions.com contains some excellent articles and FAQs.
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The
StockOpter® Insight Support Center contains a variety of white papers and general resources that address concepts such as time value, leverage and volatility in greater detail.
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News & Announcements |
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If you would like either initial training or a refresher on using StockOpter® Insight and StockOpter® Pro call us at 877-728-5964 to enroll in an upcoming webinar:
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StockOpter® Insight: August 17th & September 14th at 10am to 11am Pacific
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StockOpter® Pro: August 18th and September 15th at 10am to 12pm Pacific
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We have developed a set of seminar slides entitled "
How to Get the Most Out of Your Equity Compensation". If you would like a PowerPoint version of these slides please contact
Bill Dillhoefer at 541-383-3899.
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If you have ever wondered about the long term effects of replacing stock option grants with restricted shares, checkout an illustration we call the "
Tale of Two Companies".
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A new resource in the "
Corporate Programs" section of our website is a full length (1 hour) streaming video of a "Personalized Equity Compensation Education Seminar".
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Here are a few quick tips on using StockOpter® Insight and StockOpter® Pro to help clients manage their equity compensation positions:
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Create a Personal Option Profile© for a hypothetical employee to share with prospects of that same firm by using the import feature in StockOpter® Insight. Simply import an existing client from your current backup file and modify the
grant and assumption information accordingly.
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If an employee is reluctant to diversify because they believe their option position still has significant upside even though their calculated leverage is relatively small, use StockOpter® Pro to illustrate how they can minimize the
risk of negative leverage with a reverse dollar cost averaging strategy. Do this by using the "By Goal" strategy wizard and applying a diversification percentage varied by year (e.g. 25% this year, 50% next and so on).
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To run another Excel file while StockOpter® Insight is seemingly monopolizing the program, startup a blank workbook and use the open function to run the desired workbook.
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Starting on August 1st you'll hear a new voice when you call us for technical support. Rebecca McCowan joins the Net Worth Strategies team replacing Yoshi who left in June to pursue other interests.
Click here for information on the NWSI team.
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