Question

You are manager of an airline company. The company issues stock options to its employees that have a fixed exercise price and term to maturity. Your company is very efficient and wel managed compared to its competitors. However, due to a significant rise in the world price of oil, all airline stocks fall and your options expire "out of the money".

Answer 1

When the stock options to employees expires "out-of-the-money", then there is no benefit to exercise the option as the shares are available at a cheaper rate in the open market. Managers complain is correct as it is a part of their remuneration.

The option will not have any value if the underlying security is prevailing below the strike price. The first solution to it could be that the issue could be sold through the brokers or underwriters and the cost should be borne by the company. The second solution is that let the current option be expire out of money, the company can reissue stock option for the employees or managers at the lower price when the price gets stable in near future. As the timing is very important while issuing Stock Option, so on having a stable price in the market, the company can go for another Employees Stock Option at lower rate.