Stock Options for graduates

Stock options are something of a corporate phenomenon these days – almost every graduate going to any investment bank or big technology company like Google or Apple expects a little “strike” options along with their lucrative base salary packages. But do these options make the most sense for the graduates?

“Strike” options are options to buy a stock – of the employer, in this case – at a certain date, at a certain time for today’s price. This is different to “in the money” call options, which are options to buy the stock under the same conditions at a much reduced value to today’s price. The higher the risk the employer is to work for, the more you should negotiate the “in the money” options, obviously.

Because we have experienced a bull market in recent years, most graduates assume that the stock valuation of their employer is destined to rise meteorically. But options are only as lucrative as far as the differential offers you a premium to what you may have made otherwise in normal market conditions.

For example, let’s say that you get some Google options at today’s strike of 681. Assuming a 52-week high of 747, and a low of 437, a beta of 1.12 looks substantially low considering. In other words, while that’s a lot of growth, the question is what happens if the beta for the company slows down to say, 0.8? You are left from here on with a reasonable stock valuation of around 720. That differential – about 7%, is hardly earth-shattering performance over a 2 year period.

In fact, a smart graduate may be able to make more investing his or her own cash-only counter-offer income at market, especially given the large beta that seems to be implied in current market conditions.