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Do you feel like you're risking the derailment of your financial future by concentrating too much of your wealth in one company? Before you consider selling your stock options, watch this video.
Gain a better understanding of the true value of stock option grants by listening to Blue Chip Partners’ Managing Partner, Daniel Seder, CFA®, CMT, CFP®, cover the two main components of stock option valuation: intrinsic value and time value.
Learn what to do whether you are “in the money” or “underwater” with your stock options. Hear Dan explain why underwater stock options are not worthless, and how to determine just how much your stock options are really worth.
Transcript:
Dan Seder 0:00
Welcome. I'm Dan Seder, Managing Partner at Blue Chip Partners. Today, I'm going to share with you how we've helped a number of our clients over the years understand the true value of their stock option grants.
Today, I'm going to talk about the two main components of stock option valuation. The first is intrinsic value. Intrinsic value represents the spread between a stock's price and the strike price at which the grant was awarded. So imagine a situation where a stock was awarded at $20 per share and grows to $25. In that case, that option grant is in the money, and that grant has $5 of intrinsic value. On the other hand, when the stock price is below the strike price, the stock option grant is deemed underwater and worthless, but we know that it's not actually worthless; that's because the second component of option valuation comes into play, which is time value. Time value represents the opportunity that the stock has to recover over a ten year period of time.
Imagine a situation where in year two, the stock falls in value and is deemed worthless on paper because it's underwater. No executive in their right mind would give that grant away because it's worthless. That's because they know that that grant still has a tremendous component of time value built into that. So time value isn't necessarily transparent; it's not reported on financial statements. If you're interested in understanding what the time value components of your option grants are worth, come see us and we'll let you know.
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