Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility
Posted: 10 Nov 1998
Date Written: January 2002
The costs associated with compiling data on employee stock option portfolios is a substantial obstacle in investigating the impact of stock options on managerial incentives, accounting choice, financing decisions, and the valuation of equity. We present an accurate method of estimating option portfolio value and the sensitivities of option portfolio value to stock price and stock-return volatility that is easily implemented using data from only the current year?s proxy statement or annual report. This method can be applied to either executive stock option portfolios or to firm-wide option plans. In broad samples of actual and simulated CEO option portfolios, we show that these proxies capture more than 99% of the variation in option portfolio value and sensitivities. Sensitivity analysis indicates that the degree of bias in these proxies varies with option portfolio characteristics, and is most severe in samples of CEOs with a large proportion of out-of-the-money options. However, the proxies' explanatory power remains above 95% in all subsamples.
Note: Previously titled "Estimating the Value of Stock Option Portfolios and Their Sensitivities to Price and Volatility"
JEL Classification: G30, J33, M41
Suggested Citation: Suggested Citation