Exercise Backdating

  

Categories: Ethics/Morals

Yesterday, you went to the gym for the first time in three months. You did four pushups and jogged for six minutes. Then, you retreated to the locker room, sweating and gasping for breath, your muscles starting to seize up like those marathon runners who end up pooping themselves at the finish line.

But you tell your friends you have been going to the gym daily for the last few weeks and will definitely be ready for the charity 5K they want to run this weekend. That's one form of exercise backdating.

Another version involves finance.

Basically, it's a way for corporate insiders to game stock options to get themselves the highest possible profit. Executives will (illegally) issue a stock option for a date that has an advantageous market price.

Shares of Frontage Prunes Inc. are trading at $7 on December 1. By December 15, the stock has risen to $10 a share. On that day, executives decide to give themselves their Christmas bonus in stock options. But they backdate the option to December 1. By fudging the date, the options are exercised at $7 a share. The executives can then immediately turn around and sell the shares at $10, pocketing $3 per share in the transaction.

Related or Semi-related Video

Finance: What are stock options in 90 se...0 Views

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Finance allah shmoop what are stock options in ninety seconds

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or less Here's a stock ibm not the tech company

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This one makes an anti constipation drug It's trading at

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one hundred eighty bucks a share Okay so here's an

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option of buy a share of ibm anytime in roughly

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the next three months For one hundred ninety dollars a

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share it's called a call option If you really believe

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the ibm will go to say two hundred dollars a

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share in the next three months well you'd be what's

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called ten dollars in the money then or then have

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a stock option or call option with a strike price

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of one hundred ninety dollars which would then have intrinsic

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value of ten bucks a share On the other end

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of the buy sell desk is the gal willing to

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sell you that call option for three bucks Three bucks

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a premium So gut check time Would you pay three

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dollars for the right to buy a share if ibm

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for ten dollars higher than where the stock's trading now

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today Meaning that to break even in the next three

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months the stock has to trade all the way up

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from one hundred eighty dollars a share to one hundred

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ninety three dollars a share jobs for you to get

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your money back but it goes to two hundred two

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share Well if you sell that option you'll have invested

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three bucks a share for a net return of seven

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bucks in just three months or less And yes we're

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ignoring commissions and taxes here because well in problems like

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this or just a in the book but three dollars

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into seven only three months Yeah that's a great score

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You'd have more than doubled your money And on an

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annualized return basis that's over a nine hundred percent dish

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return really good score but with a much more likely

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case that you spend three bucks to buy the option

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and it expires totally worthless And then you've lost your

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entire investment in that option So that's a call option

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It's evil twin is a put option So whereas a

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call options the rightto by a security to set price

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by a certain set date a put option is the

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right to sell that option We'd go into more detail

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here but we're promised ninety seconds

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