Underwater Option

An out-of-the-money stock option. That is, it describes an option in which the underlying asset is a stock that is currently trading for less than the strike price of the option. For example, an executive at a publicly-traded company may have stock options in which he/she may buy the stock of his/her own company for $80 per share. If the stock is currently trading at $60 per share, the options are worthless.

References in periodicals archive ?

Such exchanges can take on one of two key forms: a one-for-one exchange, similar to that recently completed by Google Inc., in which each underwater option traded in is replaced with a new option with a lower exercise price; and a value-for-value trade similar to the recent Starbucks Corp.

Rescuing drowning stock-option programs: despite congressional and shareholder backlash against excessive executive compensation, companies facing employee motivation and retention issues cannot afford to remain on the sidelines when it comes to restructuring their employee stock-option programs

Panel B of Table IV shows the values of vega-to-delta and vega as a percentage of salary plus bonus for all executive-year observations, and also the underwater option observations.

Managerial risk-taking incentives and executive stock option repricing: a study of US casino executives

And in practice, the underwater option problem causes significant problems for companies that rely heavily on options.

The challenge of turning managers into owners

Risk factors, such as stock price volatility help reduce the option value, but an underwater option may have current value.

How to Unmarry a Millionaire

'This generated a great deal of interest from all over the world and inspired us to look at the underwater option as we are aware that Nessie does not often make it to the surface.'

Underwater webcam watches and waits to catch elusive Nessie in its Net

One-for-one exchanges, where the optionholder receives a new, market-priced option for each underwater option, are the most controversial, as the executive recovers the entire value lost in the stock market decline, and so is relieved of the pain felt by the shareholders.

Repricing challenges: directors need to weigh many competing considerations

Underwater options do not contain any type of natural correction mechanism to preserve their retentive value.

A compelling alternative to stock options

In November 2009, 99% of Fortune 500 CEOs held underwater options (Tammy Whitehouse, "Companies Awash in Underwater Stock Options," Compliance Week, April 2008).

Underwater stock compensation: what options do employers have?

Thus, it could receive a deduction for underwater options that are sold.

Are TSOs a new trend? Already employed by Microsoft and Google, transferable stock options may be the incentive plan of the future

Underwater options. When an option is underwater, Statement no.

Options and the deferred tax bite: just when you thought it couldn't get any more complicated