Underwater Option

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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.
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The company also found an alternative to repricing for underwater options, "a voluntary option exchange." Options priced at more than $22--current prices range between $9 and $19--could be exchanged for restricted stock, which has "economically equivalent" value as computed using a "modified Black-Scholes calculation." It also resorted to awards of restricted stock in an effort to retain two valued executives.
* Authorized new grants of stock options to replace underwater options. * Consistently granted an excessive number of shares.
"In the last year, people gotten so many underwater options that they've lost faith in them," Hall says.
* Substitution of restricted stock grants for underwater options. Repricing is even worse, I guess.
Such progressive compensation design is a radical departure from the thinking of CEOs like John Sculley of Apple, who in 1990 received re-set options, where underwater options were canceled and reissued at a lower market price.
Underwater options do not contain any type of natural correction mechanism to preserve their retentive value.
In November 2009, 99% of Fortune 500 CEOs held underwater options (Tammy Whitehouse, "Companies Awash in Underwater Stock Options," Compliance Week, April 2008).
Second, like MGM Mirage, companies can exchange underwater options for restricted stock or units--typically via a value-neutral exchange accomplished through a ratio incorporating the fair value of the underwater options and the current stock price.
Underwater options. When an option is underwater, Statement no.
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