What does underwater mean in some empolyees' stock options are underwater?

Joaquin Becker asked a question: What does underwater mean in some empolyees' stock options are underwater?
Asked By: Joaquin Becker
Date created: Fri, Jun 4, 2021 1:33 PM

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Those who are looking for an answer to the question «What does underwater mean in some empolyees' stock options are underwater?» often ask the following questions:

🌊 What does it mean to say that one's stock options are underwater?

There are two basic kinds of options: the kind you get as part of your pay, and the kind you invest in. "Underwater" refers to the first kind, and it just means the strike price of the option is higher than the market price of the stock--hence worthless, since if you were holding an option on Acme at 28, and Acme was selling at 25, you certainly wouldn't exercise an option that would cause you to lose $3 per share! Options bought as investments that are in similar straits are called "out of the money."

🌊 My stock options are underwater?

  • An option is underwater if the current stock price is lower than the strike price. Underwater options don’t have current intrinsic value, and it wouldn't make sense to exercise an underwater option, because you could acquire those shares in the open market at a lower price.

🌊 What to do with stock options underwater?

  • Historically, one solution that was widely used to deal with the problems caused by underwater stock options was to “reprice” the stock options. Repricing simply involves lowering the exercise price of the stock option, generally to equal the current fair market value of the underlying stock.

1 other answer

It means that the strike price, which is the price you can buy your company's shares for, is higher than the market price such that there is no sense exercising your options for the shares at all.

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