07/22/96 TABLE: So, How Much Are They Worth?

So, How Much Are They Worth?

HOW THE PROS DO IT Traders often use the Black-Scholes option pricing model to calculate the value of short-term exchange-traded options. It incorporates such variables as stock-price volatility, interest rates, dividend yield, the difference between the stock's price and the options' strike price, and the time until expiration. You can find the formula in finance texts, or ask your broker. A LAYMAN'S SHORTCUT For companies with average stock price volatility, 10-year options, and an average dividend yield, the Black-Scholes option value is typically 33% of the price of the optioned stock on the date of the grant (e.g., $33 for a $100 stock). The percentage may be above 50% for highly volatile stocks with low to no dividends or 25% or less for less volatile stocks with higher dividend yields. THE EASIEST WAY Here's how you can project the gain: Say you receive 10-year options on $1,000 of stock today. Assuming that the stock will grow 10% a year (based on historical performance) over the decade, the optioned shares will be worth approximately $2,600 ($1,000 x 110% annually for 10 years). Then subtract the $1,000 option price from the $2,600 value, yielding a $1,600 gain. Next, add the 10-year Treasury yield (approximately 7%) to an equity risk premium of 6% (13%). Finally, find the present value of the $1,600 gain by using the 13% discount rate ($1,600 divided by 1.13, 10 times). That works out to $471, or 29%. DATA: ROBERT SALWEN, EXECUTIVE COMPENSATION CORP.