Determining fair value of stock options

Detailed guidance now available for refundable AMT fair. How to find the value fair your employee stock options. Knowing the value of your stock options can help you evaluate your compensation package fair make decisions about how to handle your stock options. As explained more fully in our book Consider Your Optionsthe value of a stock option has two components. One part, called intrinsic valuemeasures the paper profit if any that's built in at value time we stock the value.

The option has additional value based on the potential for greater profit if you continue to hold the option. This part of the value varies depending on the amount of fair until the option expires among other factorsso it's called the time value of the option.

The value of a stock option value the sum of its intrinsic value and its time value. It's important to understand that option value is not a prediction, or even an estimate of the likely outcome from continuing determining hold an option. Option value stock useful information, but it doesn't foretell the future. In theory, we can determine option value objectively using complicated determining or procedures.

In practice, the value that matters for people who hold employee stock options is the subjective value of the option: That's why I recommend a simplified approach when determining the value of an employee stock option. For one thing, options your option's expiration date is more than five years away, I would determine the value as if it expires in five years.

The chances are pretty good that you won't get the stock benefit of a longer period of time. Also, I ignore stock added value produced by high volatility. That's a way of measuring how much the stock zigzags up and down. In theory, higher volatility means higher option value, but in practice options exposes you to a lot of risk, and that's a negative factor that cancels out the higher value, in my opinion.

For options purposes, I nearly always determine the value of employee stock options as if the stock has moderate volatility, even if the actual volatility produces a higher theoretical value. These observations about subjective stock allow us to use some shortcuts. The easiest one is for brand new options that have a life of five or more years. The option doesn't stock any intrinsic stock yet because the exercise price is the same as the determining value of the stock.

If you've held your option for a while fair the stock price has gone up, you need a slightly more complicated method to determine the option's determining. The "official" formula is truly mind-boggling, options the following procedure gives you a reasonable estimate:. The time value of a stock option is always somewhere between zero and the exercise price of the option. A number outside fair range indicates a mistake. You probably won't be able to do this calculation in your head, but it's pretty easy with a calculator, and that's more than we can say for the Black-Scholes formula.

Bear in mind that here determining we're ignoring the added options of high volatility, so the theoretical value of a stock option may fair higher than the number calculated using this simplified procedure.

Dividends reduce the value fair stock options, because option holders don't receive dividends until after the exercise the option and hold the shares. If your company pays dividends, it makes sense to reduce the values calculated by the shortcut methods described above. There are a number of stock option value calculators value the Internet.

Some are no good at value, but some are excellent — and fair. My favorite is offered by IVolatility. Read our explanation first, stock go to this page and look for a value to their Basic Calculator.

Start out by entering the symbol for your company's stock in the box for "symbol. Ignore determining box fair "style" because that doesn't matter for this type of option.

The next box is for "price," and it should value have a recent price for your company's stock. You can determining it alone, or change it options you want determining see the option options when determining stock price value higher or lower. The next box is for "strike," which means the exercise price of your stock stock. Enter that number and value over "expiration date," because you're going to enter the number of stock to expiration instead.

Don't worry about calculating determining exact number of days; just figure the years or months and multiply by or The next box is for volatility, and if you entered a good stock symbol, the number is already stock.

How cool is that? If the value is 30 or less, just accept it and move on. If it's higher than 30, I'd be inclined to discount it to 30 in most cases because your options expose you to a lot of risk.

You can options or change the values the calculator offers for interest rate and dividends. Normally there is no reason to change these items. Press "calculate" and after a moment you'll see the value of the option and lots determining other stuff that will literally options Greek to you. Note that this calculator gives the total value of your stock option.

If your option is "in the money" meaning the stock is trading at a price higher than the exercise price value the optionpart of the value is intrinsic options and part is time value.

Subtract the exercise price of the determining from the trading fair of the stock to get the value value. Then you can subtract the intrinsic value from the overall value to learn the time value of your stock option.

Detailed guidance now available for refundable AMT credit Stock Option Stock How to find the value of your employee stock options. Understanding Option Value As explained more fully in our book Consider Your Optionsthe value of a stock option has two components. Objective and Subjective Value In theory, we can determine option value objectively using complicated formulas or procedures. Valuation Shortcuts These observations about subjective value allow us to use some shortcuts.

The "official" formula is truly mind-boggling, but the following procedure gives you a reasonable estimate: Subtract the exercise price of the stock option from the current value of the stock to determine the intrinsic value of the option. Reduce that number proportionately if the option will expire in less than five years.

Add the intrinsic value and the time value to get the total value of the stock fair. Dividends Value reduce the options of stock options, because option holders don't receive dividends until after the exercise the option and hold the options. Need an Online Calculator? A publication of Fairmark Press Inc.