I need some help with this question about call options?

Question

An executive compensation scheme might provide a manager a bonus of $1,000 for every dollar by which the company's stock price exceeds some cutoff level. In what way is this arrangement equivalent to issuing the manager call options on the firm's stock?

Answer 1

Ways that it is similar:

If the stock does not exceed a certain price at a certain time the manager gets nothing.

The more the stock exceeds the threshold, the higher the bonus will be.

The return is roughly equivalent to the increase in the price of a fixed number of shares above the threshold.

The maximum return is unlimited.

If the call options were European-style settlement any profit would be recognized on a fixed date.

Answer 2

If that stock does not exceed the cutoff level, the bonus is worthless. Same as a call option is worthless if in does not equal or exceed the strike price.

Answer 3

that's a bad example but I guess both want a stock to reach a certain point by the cutoff level?
He's using part of his pay as the premium and if he hits the cutoff point it will be profitable if it doesn't he'd have been better off taking $.....?

Answer 4

The company executive buys LEAPS:
Long term
Equity
Anticipation
Participating options.

This type of option - calls and puts is just like any other option with one exception: It expires in 1 to 2 years. ALL LEAPS expire in January of each year.

Like every other option, LEAPS decay - at a much, much slower rate. These can be bought and sold at any time within the time period.

Thanks for asking your Q! I enhoyed answering it!

VTY,
Ron Berue
Yes, that is my real last name!

Answer 5

it isn't ................with options you can decide WHEN to exercise the option................with your plan.the price goes up.great.but it can go down again .............no control.............