Leverage with Stock Options
Leverage is generally associated with some sort of debt against an asset: when the asset goes up in value, the investor is able to magnify their return, but when the investment goes down, it can obviously magnify the loss as well. Executives of companies that have stock options may also be subject to leverage risk. They may have to borrow some or all of the money needed to exercise their options. The executive may also need to borrow money to cover some or all of the tax liability for the exercise of their options. Because of this hidden leverage, the executive may be exposed to substantially greater risk than just the high risk of their concentrated position in company stock.
Options themselves have built-in leverage that can magnify the price movement of the underlying stock. In the last couple of years, we have seen a 30% drop in stock price result in a more than 50% drop in stock option value.
Equity Compensation Advisor’s Moral: In evaluating a clients option portfolio, all of these factors must be taken in to account when assessing the executives overall risk exposure.
Securities offered through LPL Financial Member FINRA/SIPC