In the vast majority of cases, options are granted “at the money, ”which means that the exercise price matches the stock price at the time of the grant.
Black-Scholes provides a good estimate of the price an executive could receive for an option if he could sell it.
Since such an option cannot be sold, its actual value to an executive is typically less than its Black-Scholes value.
But the potential for higher payoff is not without a cost—higher volatility makes the payoff riskier to the executive. The higher a company’s dividend rate, the lower the value of its options.
Companies reward their shareholders in two ways: by increasing the price of their stock and by paying dividends.
Michael Eisner exercised 22 million options on Disney stock in 1998 alone, netting more than a half-billion dollars. It would be difficult to exaggerate how much the options explosion has changed corporate America.