Benefits of backdating stock options

Options backdating occurs when companies grant options to their executives that correspond to a day where there was a significantly lower share price. It is suspected that these situations are not a coincidence and that the board or executives were granted options based on a past date in order to make these options more profitable. At first glance, call options represent the perfect way to tie an executive's level of compensation to the company's performance because as the company's share price increases, so does the payoff the executive will receive.

However, this concept is not perfect and there are ways that executives can take advantage of the way that options are granted in order to earn money.

An option's strike price is usually chosen by taking the stock's closing price on the day that the option was granted, calculating an average of the day's high and low prices or by taking the closing price from the previous day's trading. For example, suppose that it is August 16, , and the closing share price of XYZ Corp. On June 1, , XYZ Corp.

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In a backdated situation, however, the options would be granted today August 16 , but their listed day of granting would be June 1 in order to give the options a lower strike price. Options backdating defeats the purpose of linking an executive's compensation to the company's performance, because the bearer of the options will already have experienced a gain.

In the past, granted options were only required to be disclosed to the Securities and Exchange Commission SEC within two months of the options being granted, which gives companies a window for backdating. Due to the implimentation of the Sarbanes-Oxley Act of , the rule has been changed and companies are now required to report the granting of options within two business days, which effectively has removed this loophole. The act of granting options with strike prices that are lower than the current market share price is technically legal, but the act of backdating the options may be in breach of the company's option plan, a shareholder -approved document that highlights the company's options policy.

In some cases, backdating can be considered an act of fraud and an SEC investigation may result.

Economist's View: Why Backdate Stock Options?

To lean more about options, see Options Basics Tutorial and Option Spread Strategies. Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund.

What is options backdating?

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What is options backdating? By Albert Phung Share. The practice of options backdating has landed many companies into the hotseat. The SEC constantly investigates possible instances Understand how options may be used in both bullish and bearish markets, and learn the basics of options pricing and certain As a quick summary, options are financial derivatives that give their holders the right to buy or sell a specific asset by Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered Before learning about exotic options, you should have a fairly good understanding of regular options.

Both types of options Any time money is involved, a scandal is sure to follow. Find out how a university study blew the cover off this one. The pros and cons of corporate stock options have been debated since the incentive was created.

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A thorough understanding of risk is essential in options trading. So is knowing the factors that affect option price. The issuance of an award, such as a stock option, to key employees A form of option granting in which the award of options is delayed A practice where option holders fraudulently claim to have exercised A list of options grants to an employee or employees of a company An expense ratio is determined through an annual A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies.

A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all A legal agreement created by the courts between two parties who did not have a previous obligation to each other.

A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation.

A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over Content Library Articles Terms Videos Guides Slideshows FAQs Calculators Chart Advisor Stock Analysis Stock Simulator FXtrader Exam Prep Quizzer Net Worth Calculator.

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