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P&G's Record Prices - What To Do With Your Stock Options - Part 3 of 4 Thumbnail

P&G's Record Prices - What To Do With Your Stock Options - Part 3 of 4


In the last blog, What Is The Real Value of P&G Stock Options, we introduced the concept of the Black Scholes model and how to value a stock option grant by finding the “Full Option Value.” Now we’ll walk through how to use that information in order to make prudent decisions when exercising your stock options. 


So, the big question for most clients is still - “When should I exercise my stock options?” As we mentioned in prior blogs, we use The Stock Options AnalyzerTM with our clients to help answer this question. Once a client understands the value of their option grant at today’s price and has a better appreciation for the inherent risks and rewards of continuing to hold a stock option grant instead of exercising today, we utilize software that specializes in employee stock options to analyze several metrics in order to come up with a decision framework and timeframe for each stock option grant that a client holds. 


The Clarity Wealth Stock Options RatioTM looks at various factors including the relationship of the Black Scholes valuation for a stock option grant relative to the “Time Value” of the same grant.

The ratio is determined by dividing the “Time Value” of the grant by the “Full Option Value” of the grant. The lower the ratio, the more compelling the argument becomes for exercising the grant.

In our prior blogs, we have used the February 2012 grant as an example and illustrated a grant of 13,000 shares at the strike price of $67.52. Using $141 per share, here are the important metrics. Today’s value is the "in the money market value"…

Using the formula from above (time value divided by full value), we see our Clarity Wealth Stock Options RatioTM is 2.8%. 


So, what does this ratio of 2.8% really mean? A ratio of 2.8% in our example means the analysis is suggesting that 97.2% of the potential value of this option grant has already been realized given the current price and time remaining until expiration. Is it worth continuing to hold this option when nearly 97% of its value has been realized?

Any combination of an increase in the “Full Value” or a decrease of the remaining time left to the option grant’s expiration (“Time Value”) will cause this ratio to go lower. In addition, the “Full Value” is still at risk when planning to hold the option for additional potential gain.

We help our clients decide what ratio percentages might be appropriate for them given their planning profile and risk propensity so that they can have a proactive and disciplined framework for when to exercise each series of P&G stock option grants that they might hold.

In our next and final blog on this subject (at least for now!), we’ll illustrate an example decision framework we might use with a client to help them design the appropriate stock option exercise strategy for their particular situation.

As always, if you would like to discuss your stock options, have any questions or if we can help in any way, please feel free to contact us at ClarityWealth@LFG.com or 513-745-7095.

Jay A. Finke, CFP®, Matt A. Held, CFP® and Robert V. Molenda, CLU, ChFC, CRPC®

The above example is for illustration purposes only and you should not base any decisions solely on it. Nothing contained in this example should be construed as investment recommendations or advice. The financial calculations provided herein are to help you understand the value, risk, and potential of an equity compensation portfolio. The values and risks illustrated in this example in no way represent a guarantee that the portfolio will produce a particular result. Additionally, past performance of your company stock is no guarantee of future results. 
The Full Option Values (FOV) and the Time Values were calculated using the Black-Scholes Merton model with an estimated volatility of 25.00 % for PG to illustrate option value. Any estimate of the future volatility of a stock price is uncertain. Therefore, there is no guarantee that the volatility used accurately illustrates the Time Value of your employee stock options. In addition, the Black-Scholes Merton model was originally designed to value market traded options. Consequently, there are some inherent limitations to the Black-Scholes Merton methodology for valuing employee stock options. Because of these limitations, this model may overstate or understate the actual value of employee stock options. However, since there isn’t a generally recognized methodology for adjusting its results for such issues, the estimated Full Option Value (FOV) and Time Value (TV) amounts contained in this report are the full, unadjusted Black-Scholes Merton model values.
Jay Finke and Matt Held are registered representatives of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Lincoln Financial Advisors Corp. and its representatives do not provide legal or tax advice. You may want to consult a legal or tax advisor regarding any legal or tax information as it relates to your personal circumstances. Clarity Wealth Management Is a marketing name for registered representatives of Lincoln Financial Advisors Corp.