The Accrual & Termination of Stock Options Due to the Sale of a Business

The Accrual & Termination of Stock Options Due to the Sale of a Business thumbnail
Stock options are common for executives in the corporate world.

Stock share options allow their holders to either purchase or sell stock shares of a specific corporation at a specified price either before or on a specified date. As such, stock share options are classified as derivatives because their values are dependent on the prices of their underlying stock shares. Because the sale of corporations can influence the price of their stock shares, this can in turn influence stock share options.

  1. Options

    • Options can be either call or put options. Call options allow their holders to buy stock shares at a specific price while put options enable their holders to sell stock shares at a specific price. As such, call options are useful when the share price exceeds the price specified in the option while put options are useful when the share price is smaller than the price specified in the option.

    Options and the Sale of Corporations

    • Common stock shares represent a type of ownership in corporations because those shares give their holders voting rights on the board of directors and on important policies. As such, someone who desires to own a corporation must purchase its common shares. Because the demand for these shares rise, so too does their share price.

    Accrual of Options

    • Changes in the underlying stock share price cause corresponding changes in option values. Because the sale of a corporation is likely to increase its stock share price, call options become more valuable while put options become less valuable. In each time period, the change in the option values because of changing stock share prices must be recorded on the accounting ledger. For example, if a business had 100 shares at $12 each, call options to sell at $12 per share, and the share price rose to $14 due to increased demand, that business needs to record a $200 increase to its options and a corresponding gain of the same value in that period.

    Termination of Options

    • Option holders can choose not to use their options for a number of reasons, though the most common reason is that using them is not profitable. Because entities attempting to purchase corporations tend to raise their stock share prices, this renders put options less valuable and thus less likely to be used. Expired options are accounted for by having their entire values written off as a loss and a corresponding deduction to wipe clean their asset account. For example, a business has $200 in put options and then declines to use them because the price has risen too high due to the sale, it then records that as a $200 deduction to options and a corresponding sum recorded as a loss in that period.

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