Market practitioners use the Black-Scholes option pricing model to determine the value of securities in such circumstances. This model incorporates statistics like an option's duration and the underlying stock's expected volatility to determine a theoretical value. To me, the theoretical option value is much more representative of what is happening at the company than nothing, which is what companies are currently recording. As we saw in the real example above, the difference between reported and options-adjusted earnings is substantial for many companies. To make sure that investors are aware of these differences, companies should be required to move this cost out of footnotes which are generally ignored and onto the reported income statement.
Options affect much more than a company's income statement.
On Friday, I'll conclude this series by looking at how options grants impact the balance sheet and the interaction between stock buybacks and option programs. EPS has been adjusted for subsequent stock splits. The Motley Fool. All rights reserved.