Knowing the Value of Stock Options Using Stock Options Calculator

Knowing the value of your stock options can help you evaluate your compensation package and make decisions about how to handle your stock options.

Here are several of the things you need to be aware of.

Understanding Option Value - the value of a stock option has two components. First, the intrinsic value, which measures the paper profit (if any) that is built in at the time we determine the value.

Second, there is the time value of the option, the option that has additional value based on the potential for greater profit if you continue to hold the option. This part of the value varies depending on the amount of time until the option expires among other factors. The value of a stock option is the sum of its intrinsic value and its time value.

 You must understand that option value is not a prediction. It is not even an estimate of the likely outcome of continuing to hold an option.

Objective and Subjective Value - option value can be determined objectively by using complicated formulas or procedures.

In practice, however, the value that matters for people holding employee stock options is the subjective value of the option. This is the value of the option to you.

There is a recommended simplified approach when determining the value of an employee stock option

• Your option's expiration date
• Ignoring any added value produced by high volatility

Valuation Shortcuts - subjective value observations allow you to use some shortcuts. The easiest one is for brand new options that have a life of five or more years.

The option does not have any intrinsic value yet because the exercise price is the same as the market value of the stock. If you ignore the additional time beyond five years, and the value of high volatility, a newly issued option usually has a value close to 30% of the value of the stock.

Check your work – Remember that the time value of a stock option is always somewhere between zero and the exercise price of the option. Once you get a number outside that range, it means that you may have made a mistake in the calculation.

Although you cannot do this calculation in your head, it can be easy when you use a stock options calculator. There is the Black-Scholes formula that may be easy once you know how to manipulate it.

Dividends – this reduces the value of stock option. The reason is that option holders do not receive dividends until after the exercise the option and hold the shares. If a company pays dividends, you can reduce the values calculated by the shortcut methods described above.

There are a number of stock option value calculators available for use in the Web. However, there those that is not too good. Meanwhile, some are excellent and take note, free.

There is a stock option calculator offered by IVolatility.com that can be easy to manipulate and brings out accurate results.

Here are some instructions in using their stock option calculator:

1. In the box for "symbol," enter the symbol for your company's stock then, ignore the box for "style" since it does not matter for the stock option trading. In the next box is the "price," wherein it should already indicate the recent price for your company's stock.

You can leave it alone. You can also change it if you want to see the option value when the stock price is higher or lower.

2. In the next box for "strike," enter the exercise price of your stock option and then skip over "expiration date." You are going to enter the number of days to expiration instead.

Do not go the trouble of calculating the exact number of days. Just figure out the years or months and multiply by 365 or 30.

3. In the next box for volatility, once you entered a good stock symbol, the number is already there.

If the number is 30 or less, just accept it and move on. If it is higher than 30 discount it to 30 because your options may expose you to a lot of risk.

You can accept or change the values the calculator offers for interest rate and dividends. There is no reason to change these items.

After you have put in all of the needed numbers in the boxes, press "calculate" and after a moment, you will see the value of the option. This calculator may give the total value of your stock option, though.