Pricing Stock Options

Putting a Value on a Stock Option

Disclaimer

I don't claim to be any sort of financial expert. Far from it in fact, but I was recently in the position of needing to put a value on a stock option being offered by a potential employer and put together a set of steps I felt comfortable with. I'll outline them here in the hope that others might find value in it. I'm sure there are standard ways to do this sort of thing but I haven't found them. This worked for me. Just note that these instructions will give only a very rough estimate of the value of a job stock option and only for a publicly traded company. I make no warranty of the utility or applicibility of this method for any purpose whatsoever. That said, have fun!

First, find its volatility

If you have it, great. If not, estimate it using the following two steps:

STEP 1

Using Datek.com:
* Go to "Options Center"
* Select "Option Quotes" tab
* In the first box, enter

underlying symbol,
"All" for in/out money, and
"Calls" option type.
Select "Show LEAPs only"

* Click "Get Options Chain"
* If this results in no options,

Unselect "Show LEAPs only",
Click "GO" again,
Select your expiration month from table header if there or the latest one if not.
If "Show LEAPs" did give results,
Select your expiration year from table header if there or the latest year otherwise.

* Mentally select the option row with "option price" closest to "Last" price. This is the value in the first column to the left of the year/month part.

STEP 2

In another window, follow these steps using the Chicago Board Options Exchange (CBOE) option calculator:
* Go to the CBOE Options Calculator
* Select "Equity Options" tab
* Enter

Datek's "Last" price from selected row into CBOE's "Equity Price" field
Copy Datek option price (see above) into CBOE's "Strike Price" field
Enter Quarterly Dividend Amount if any, 0 otherwise

* If LEAP was used above, enter "Days Until Expiration", otherwise select expiration month/year
* Click "Volatility" button.
* Select "Call" and enter Datek's "Ask" price for your selected option.
* Click "Calculate". This fills in the volatility estimate for your stock.

Finally, calculate the value of the stock option value to you

Now that you know or have an estimate for the volatility for your stock,
You just need to change the CBOE calculator values to those of your real option:

* Change "Strike Price" to your offered strike price
* Select and change "Days Till Expiration" (ex: 4 years = 4*365 = 1460)
* Hit return. The estimated value of your stock option is the displayed "Theoretical Price" times the number of share options.
* Since the above is highly variable, try a variety of other possible volatility values and recalculate to get an idea of potential other values.

Note that this result can be considered the value of an offer of a stock option to you. For example, if you find that the value of a 5,000 share stock option from company XYZ is $40,000 you can weigh that against the salery, sign-on bonus, etc.

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