The leverage inherent in employee stock options has always been addressed in StockOpter.com, but there is a new table that now provides additional insight. Keep in mind that stock options have leverage because they are granted at a fixed exercise price. Consequently, a stock price change of 10% will yield a higher percentage change in value. Restricted stock grants and shares of stock do not have leverage. If the underlying stock price changes by 10%, share value changes by the same 10%. For more information on leverage check out this Leverage Concept Video.
The original StockOpter leverage analysis table shown below calculates the value change for an incremental change in stock price for all of company stock and options entered into StockOpter.com. In this example, if the stock price increases from the current price of $22.90 to $25.19 (10%) the value of this person’s options increases by 33.2%. However, leverage is a two-edge sword because when the stock price decreases by 10% down to $20.61 the value of the options decrease by nearly 31%. The moral of this story is that stock option exercises need to be timely to minimize the effects of negative leverage.
The new StockOpter leverage table (below) calculates the leverage factor for each individual stock option. Due to size constraints, this table shows only a single positive and negative incremental price change. Details like the exercise price and expiration date are also excluded, but can be cross referenced on the “in-the-money” value table. It can be inferred that zero value fields indicate under water grants (where the stock price is below the exercise price) and grants with small value change percentages have significant intrinsic value. This table also correlates with the Insight Ratio table. Grants with small value change percentages will have low Insight Ratios. However, leverage doesn’t factor in “time to expiration” so it is a less accurate indicator of when to exercise than the Insight Ratio. Nevertheless, it can be used to help stock option recipients to better understand the leverage effect and make informed decisions.
This new table is included in the updated “All Output” template as leverage table #3 so users can view it with any of their current participant cases. It has also been integrated into all of the NEW report templates. If you have any comments regarding this table please share them below. Alternatively, you can email questions to firstname.lastname@example.org.