Options Outstanding
November 19, 2020
What are Options Outstanding?
Options outstanding refers to the total of all options granted that have not yet been exercised, forfeited or expired, irrespective of whether they are vested (exercisable) or otherwise.
An equity option is a derivative contract between two parties, where one of those parties has the right to trade a fixed quantity of specific stock at a price fixed today on a fixed future date. Employee stock options are a common example of this type of contract which grants employees the right to buy shares at a discounted price, often called the strike or exercise price.
Options can be in different stages: granted, exercised, and forfeited/expired. Granted refers to options awarded, but the option holders do not have the right to exercise them or convert to equity shares. Exercised options have “vested” and the holder has a period of time to exercise the right to convert them to shares. If forfeited or expired, then these options are no longer valid, and the holder must surrender them.
Calculating Options Outstanding
Companies must report the number of options outstanding at the end of each fiscal year. The number of options outstanding at the year-end is calculated based on the activity during the year. Here is an example:
The company had 2,644,000 options outstanding at the beginning of the year. During the year, it granted 362,000 options, which are added to the original count. The options exercised (758,000) and forfeited (27,000) are deducted from the total count. The total of this activity is the options outstanding at the end of the year.
Finding Options Outstanding in Financial Statements
You will rarely find options in one of the three main financial statements (income statement, balance sheet, and cash flow statement). You may find some information in the Management Discussion & Analysis, specifically around the remuneration of certain executives of the company. However, the footnotes section is the best place to look. If you are looking at a quarterly or an interim set of accounts, you will not find much information on options. But the annual set of accounts often feature detailed information on options outstanding.
Following is a screenshot of the options outstanding of Gamestop Corporation.
Here is an explanation on some of the key terms in this section:
Options Outstanding:
Outstanding options include those that can be exercised right now and also options that cannot be exercised yet. Firms give these latter options to key employees, such as a CEO, to incentivize them to stay with the company and improve the share price. If they were to leave the company during this period, they would have to surrender those options.
Options Exercisable:
Exercisable options are only those that can be exercised now. When diluting shares, we would normally use the outstanding number. Why? If the company is acquired tomorrow, all options (exercisable and even those not exercisable) are instantly allowed to be exercised. So, the dilutive effect of all options needs to be included.
Weighted Average Remaining Life:
Different groups of options have different contractual lives. The weighted average remaining life is calculated based on each group’s weight in the total number of outstanding options. For example, in the screenshot above, the category $20.32 – $20.69 has a remaining life of 3.58 years and a weight of 7% (0.1/1.4.) So, it contributes 7% to the overall weighted average remaining life.
Weighted Average Contractual Price:
Like the weighted average remaining life, the weighted average contractual price is calculated based on each category’s exercise/strike price, and each category’s weight in the total number of outstanding options.