Due to the COVID-19 pandemic, many public as well as private companies are faced with a (substantial) decrease of their share value.
Therefore, it could be interesting to introduce a stock option scheme now, before the stock market revives. Indeed, such stock options not only provide the beneficiaries the opportunity to profit from the lower exercise price compared to the issuance of a stock option scheme under “normal” conditions. It also provides an incentive mechanism, which could result in a faster recovery of the company.
However, the option value is expected to move in the opposite direction of the stock value in current circumstances. Volatility of the underlying stock is one of the key inputs to determine the fair value of an option next to the exercise and current price of the underlying stock as well as the life of the option. Due to an increase of (expected) volatility, the option value increases as well.
Hence, although the option cost might increase due to an increase in volatility, current market conditions provide an opportunity to establish a stock option scheme as stock value decreased significantly.
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