Tracking Stock Options

Knowing when to exercise options can be challenging. If options are exercised too early, the upside is lost. If the options are not exercised early enough, the value could drop substantially. By utilizing various ratios, we can eliminate some of the uncertainty when it comes to the timing of exercising options.
While stock price determines the in-the-money value, it is the Time Value that provides you with unique insight into the theoretical potential of each option grant. Generally, when you exercise an employee stock option before expiration, you will be foregoing the remaining Time Value.
For planning purposes, we utilize various ratios to help clients create a decision-making frame work that is unique to their individual options.

  •      Insight Ratio®:  This ratio is the Time Value divided by the Black-Scholes Value for each vested option. Consequently your Insight ratios represent the remaining theoretical potential in each grant. As your options approach expiration or the in-the-money (ITM) value increases, the Time Value of your option will decrease thereby lowering the Insight Ratio®. An option with a low Insight Ratio® means that most of its value is ITM value. A ratio of 5% says that 95% of the total theoretical value has currently been realized and the ITM value is at risk by continuing to hold the option.

     

  •   Value at Risk: In an attempt to further identify and convey the risk in your company stock and option position, we have adopted the Value at Risk (VaR) methodology used by many financial institutions to determine their exposure to negative economic events. VaR is computed using the same volatility as used in the Black-Scholes calculations for the underlying stock. Using this methodology, under normal market conditions the VaR will show the amount of a 5% chance of loss or more within 30 days using the total ITM value of your company stock and vested options. Please pay close attention to the phrasing “under normal conditions” and “or more.” VaR methodology generally cannot provide an estimate for the size of losses in those scenarios where the VaR threshold is exceeded.   It is possible that you could lose the entire cash-out value of your vested, ITM options and stock.

     

  •     VaR Ratio: This ratio is the Time Value divided by the VaR (value at risk) for each vested option. It is a comparison of the theoretic potential (Time Value or TV) to the theoretic risk of the option at the current time. The lower the TV/VaR percentage, the more compelling is the argument for diversifying the option. For example, a ratio of 25% means that the theoretic risk is 4 times as large as the theoretic potential. Please note, while the value of this ratio could be infinitely large, a 1,000% ceiling has been asserted.
An individual’s time horizon, risk profile, and upcoming cash flow needs should be evaluated to help in determining the level of Insight Ratio® and VaR ratio needed to exercise. The following table is only a guide for establishing a general decision framework.
Planning Horizon/Risk Profile
VaR Ratio
Insight Ratio®
Short/Conservative
Less than 150%
Less than 150%
Medium/Moderate
Less than 100%
Less than 100%
Long/Aggressive
Less than 50%
Less than 50%