The strike price of a compensation option is generally set on the day the option is issued.

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The strike price of a compensation option is generally set on the day the option is issued. On November 10, 2000, the CEO of Analog Devices, Jerald Fishman, received 600,000 options. The stock price was $44.50. Four days later, the price rose to $63.25 after an earnings release:
Maria Tagliaferro of Analog said the timing of the two events [option grant and earnings release] is irrelevant because company policy is that no option vests until at least three years from its granting date. "What happens to the stock price in the day, the hour, the year the option is granted is not relevant to that option," she said. "The stock price only becomes relevant after that option has vested."26 In its annual report for 2000, Analog Devices reported that the expected life of its options granted that year was 4.9 years, with a 56.6% volatility and 6% risk-free rate. The company paid no dividends until 2003.
a. Using the inputs from the annual report, and assuming no dividends, estimate the value to the CEO of an at-the-money option grant at a stock price of $44.50.
b. Estimate the value of an at-the-money grant at a price of $63.25.
c. Estimate the value of a newly granted option at a strike of $44.50 when the stock price is $63.25.
d. Do you agree with Maria Tagliaferro? Why or why not? Strike Price
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.
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Derivatives Markets

ISBN: 9789332536746

3rd Edition

Authors: Robert McDonald

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