Valuing Employee Stock Options

There are different ways to value employee stock options. The simplest way to calculate the value of the option is already given in this article together with the binomial model.

Either way, you can value the options. Just pick the method which works for you best and use it whenever you need to value your stock options.

Valuing Employee Stock Options – Binomial Model

Valuing employee stock options is vital and it should be understood well by the employees and employers. The employee stock options are usually subjected to forfeiture rules and vesting requirements. It is also non transferable and will be for the long term. Experts say that the best way to value stock options is through the binomial model (lattice) since it considers the stock options’ characteristics. The good thing about this option is that you can tailor it according to your needs and requirements. If you are one of the employers out there who are still searching for alternative methods, this may be an excellent choice.

Firstly, you will need to create the standard binomial model. You might want to consider learning more about the CRR (Cox, Ross, and Rubinstein). You will need to enter the required data in Excel. You should also setup the ‘stock price tree’ based on the binomial theory. After that, you will develop an ‘option tree’ and this can be done through backward induction. Upon expiration, the stock option will be the same as the greater intrinsic value or zero.

Valuing Employee Stock Options – The Simpler Way

You have to learn how it works. When you (employee) are given a stock option, you can buy a certain number of company shares at a strike price. Since the option has an expiration date, you will need to use it on or before such date. You have to monitor the stock price and once it goes higher than the strike price, you can sell it and earn money. Before using the stock option, you must read the terms/conditions. When valuing it, you can simply take note of the strike price and the shares that come with the option. Try to inquire if there is a waiting period before you can use the option. For instance, if the option is for 100 shares and the strike price is $30 while the share’s market price is now at $45. You will get the difference of the amounts and multiply it with the number of shares of the option.

The valuation is simply an estimate until you’re able to sell the shares. As long as you’re holding the stock option, its value can go up or down. Once you’ve sold the option, then you can now determine its true value. So you see it’s not really hard to value the stock options as long as you know how they work. So, can you now value your own stock option? Use these steps.


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