Finance stock question

Business & Finance
Tutor: None Selected Time limit: 1 Day

How is it possible for an employee stock option to be valuable even if the firm’s stock price fails to meet shareholders’ expectations?

 

 

Apr 19th, 2015

Stock options are in essence the right to buy a specified number of shares at a specified price (known as the "strike price") within a specified period of time. If at any given point the current price of a share of stock is higher than the strike price, the options have value. Both stock price and shareholder expectations tend to fluctuate, and not always in the same direction at the same time, so it's quite normal for the two to be at least temporarily out of alignment.

Think of it this way. The value of the options is based on the difference between the current stock price and the strike price, while shareholder expectations are based on what shareholders collectively thought the stock should or would be worth. If a share of stock is worth more than the strike price, but less than the shareholders were expecting, it would result in the situation you describe.

Apr 19th, 2015

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