When the Boss Gets Option Grants, It's Time to Buy July 18 (Bloomberg) -- Want to profit like a chief executive officer? Then buy shares in their companies as soon as the CEOs are given stock options.
An investor who purchased shares of companies, including Advanced Micro Devices Inc. and Yahoo! Inc., after they disclosed option awards and sold the stock three months later could have beaten stock market benchmarks by 5.2 percentage points annually from mid-2002 through 2005, data compiled by Bloomberg show. Holding until 180 days after the grant beat the indexes by an average 4.2 percentage points, according to the examination of 4,290 grants made by 1,700 companies. ``If these grants are a heads-up that a stock will rise, then investors should pay attention,'' said Byron Wien, chief investment strategist at Pequot Capital Management in New York, which invests about $7 billion in assets. ``We're all out to make a buck in the market.'' The outsized returns were led by gains in companies where CEOs were awarded options when stock prices were at their lows, the analysis found. At least 64 companies are facing investigations into whether they manipulated option awards to inflate their value. Investigators also are looking into ``spring-loading,'' in which companies give out options before the release of good news. Such practices may be criminal acts, said U.S. Attorney Kevin Ryan in San Francisco on July 13 when he established a task force to examine stock-option fraud. Prosecutors have issued grand-jury subpoenas to more than 40 companies. Full story: http://www.bloomberg.com/apps/news?pid=20601109&sid=anP_TqNjLAFw&refer=h ome Jayson Funke Graduate School of Geography Clark University 950 Main Street Worcester, MA 01610 -----Original Message----- From: Jayson Funke [mailto:[EMAIL PROTECTED] Sent: Monday, July 17, 2006 7:50 PM To: 'PEN-L list' Subject: RE: [PEN-L] Another 9-11 conspiracy Jim Devine wrote: "It's not really dilution of the stock, however, since there's no new stock being issued." If no new stock is issued, I imagine then, that there is no guarantee that when the time comes and the holder decides to sell his/her options that there will necessarily be enough willing buyers? Or is the company that issues stock options responsible for ensuring that all those options (when exercised) will be purchased at the market price? In other words, is the option holder guaranteed a future sale, or are they at the markets whim? Jayson Funke Graduate School of Geography Clark University 950 Main Street Worcester, MA 01610 -----Original Message----- From: PEN-L list [mailto:[EMAIL PROTECTED] On Behalf Of Jim Devine Sent: Monday, July 17, 2006 12:12 PM To: [email protected] Subject: Re: [PEN-L] Another 9-11 conspiracy Jayson Funke wrote: > If I understand correctly, stock options are one way for corporations to > compensate executives (or whomever they are granted to) at the expense > of the market (other shareholders, through the securities market, in > effect pay the executive when he/she sells her options). > > But do stock options really cost corporations nothing? if I understand correctly, there is no significant out-of-pocket cost to options for a corporation. An option gives one the ability to buy a share at a specific price on a specific date. (It's a little like a claim token at the coat rack at some restaurants.) It's when an option is exercised that it has an impact. The person holding the option can then buy the stock at a low price (pre-set when the option was issued) and sell it at a high price (the current market price). Both of these acts can have the impact of lowering the market price, so that it's the people who own the corporate stock at the time who lose (a capital loss). It's not really dilution of the stock, however, since there's no new stock being issued. Lowering the stock price (if it's significant) can have an impact on the issuing corporation, because it makes it harder to raise new funds. It may also hurt the market's faith in the corporation's future profitability. If executive compensation is hooked to stock price (but not through options), then the executives would be hurt. So, even though the issuing of options has an extremely low out-of-pocket cost, the actual cost may be higher. The fact that the actual cost is in the future and thus uncertain means that the corporation might ignore them. I don't know what the tax issues are. I am not an expert on this subject at all. Please correct any errors. -- Jim Devine / "You need a busload of faith to get by." -- Lou Reed.
