Okay, super technical concept and term, but one that has extreme compensation differentials, depending on who you are and, well, how sleazy you want to be.
First start with the notion that stock options are granted as compensation for key employees in early-stage companies, and also for very senior officers of public companies. When companies are private, usually the board of directors oversees the granting of options. They commit to the number granted, who gets them, and the strike price of those options, usually done as options on common stock (not preferred), and granted at the last valuation done on the company by some cadre of value-assessing lawyers and bankers who did something very bad in a former life to end up deserving this kind of career.
In a private company, there "are no rules" in the manner in which public companies have tons of rules. In a private company, the view is generally that they are owned by a relatively small handful of people, all of whom are big girls and boys and know how the game is played. So option strike prices get granted with most or all parties knowing wassup.
In public companies, the diff is big. That is, stock options strike prices usually have a formula behind them, i.e. "whatever the end of day closing price of the stock is on the day said options are granted shall be the strike price of the options granted to said employee." Ok, but what date were the options officially granted? When the employee nodded vaguely that she'd accept the job? Or on the last Friday of last month? Or when they signed on the dotted Hellosign?
So then what happens if a stock was at $18 a share last month and zoomed on the announcement of the potential hire of a rockstar CEO? And, in fact, an ethical situation did, happen and it was with AAPL and Jobs' option package as CEO. Overly simply, the company backdated the strike price of his options a month or two or three (what's a few months among friends?). Well, it was about $22 in value appreciation per share from back-then $69 to about $90 a share, where the company set his strike at the $69 figure insted of the date-signed-on-bottom-line date when his options were granted.
Investors sued. Apple demurred. They hired better lawyers. They cared more. And the whole mess was quietly papered over. Nothing like a winner stock that's making "everyone" money to make it easier for legal (or at least ethical) violations like options backdating to, um, just go away.
Related or Semi-related Video
Finance: What Is a Put Option?83 Views
finance a la shmoop what is a put option? hot potato hot potato
ow ow! yeah remember that game well nobody wanted the potato, poor thing. the
players wanted to put it in someone else's hands. well put options kind [glue put around a flaming potato]
of work the same way. a put option is the right or option or choice to sell a
stock or a bond at a given price to someone by a certain end date.
all right example time. you bought netflix stock at the IPO a zillion years
ago at $1 a share. that's you know splits adjusted. all right now it's a hundred
bucks a share. if you sell it you pay taxes on a gain of 99 dollars a share. in
California that would be a tax of something like almost 40 bucks. well the
stock was a hundred but you keep only something like 60. feels totally unfair.
right so you really don't want to sell your stock but you're nervous about the [graph shown]
next few months that Netflix will crater for a while and go down ten
maybe twenty dollars. longer term though you think it'll hit 300. so this is the
perfect setup to maybe look at buying some put options on Netflix. if the stock
goes down your put options go up. with Netflix volatile but at a hundred bucks
a share ,you look up the price of an $80 strike price put option expiring in
December, and you know that's mid-september now .for five bucks a share
you can protect your stock for the next few months .think about it like temporary [stocks placed in vault]
term life insurance. you pay the five dollars a share in the stock goes down
to 82 by mid December, worst of all worlds. well not only did you lose the $5
a share but your stock has lost $18 in value. but had Netflix really cratered
and gone to say $60 a share well you would have exercised your put and sold
your shares at 80 bucks. well those put options you paid $5 for
would be been worth 15 bucks a share. in buying that put option you've [equation shown]
guaranteed that your loss will be no more than a $75 value for your Netflix
position at least for that time period and ignoring taxes. well remember that
options expire after December whatever like the third Friday of the month it's
usually when options expire, you then have no protection and your shares float
along naked. naked? really who knew accounting could get so [paper put option goes "skinny dipping".]
raunchy. yeah well that's naked put options.
that's what they really are people.
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