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lecture_options_521_2011

lecture_options_521_2011 - Compensation Stock Options 1...

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1 Compensation Stock Options
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2 Goals: You should be able to … Explain the difference between puts and calls Describe employee stock options Characteristics Growth over time Why firms grant them Implications for corporate finance
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3 Calls and Puts A call option gives its owner the right, but not the obligation, to buy a stock at a specified exercise or strike price on or before a specified exercise date. European call options can be exercised only on a particular day American call options can be exercised on or before the date A put option gives you the right, but not the obligation, to sell a stock at a specified exercise price on or before a specified exercise date.
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4 Puts and Calls (Payoffs from the Buyer’s Perspective) (a) Stock (b) Call Option (c) Put Option Value Value Value 50 50 50 50 P 50 P 50 P Payoff diagrams show how the payoffs to owners of stock, call and put depend on the share price. (a) shows payoff to owning one share. (b) shows payoff to buying a call option exercisable at $50. (c) shows payoff of buying put option exercisable at $50. {Note: To compute the profit of an option, you would need to subtract off price of the option!}
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5 Employee Stock Options When employees are granted “stock options,” they are being granted call options on the company’s stock.
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