Wednesday, January 1, 2014

Spring Loaded Option Definition and Meaning

What is a spring loaded option?

A spring-loaded option is a stock option that is granted shortly before the company releases information that is expected to increase the price of the stock and, as a result, the value of the option.

The practice of spring-loading options is often controversial. Option strike prices tend to be derived from the grant day's stock price.  On the day of the granting the option should be "at the money".

Theoretically, executives should benefit from options-based compensation only if their performance has increased the value to shareholders (shareholder value). As a result, critics of spring loaded options argue that allowing the holder of the option to gain instant profit defeats the option-based compensation's purpose. Others argue, however, that spring loading effect's are minimal, as most option grants have a vesting period, that prevents the holder from realizing their position for a period of time. As a result, the option might be "out of the money" long before the investor can exercise the option.
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