[fastball]

I realize this is still confusing, so here is a concrete example with made-up numbers.

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Netflix offers you stock options that themselves are worth $100, based on various input factors like fair market value of NFLX, interest rates, volatility, dividend yield, etc). Now let's say the strike price of those options is $900. You decided you want all of your $300k/y comp in the form of these options (which are valued each at $100), so you end up with the option to buy 3000 NFLX shares at a later date.

Netflix has a great year (partially thanks to you!) and now NFLX is trading at $1200. You exercise all of your options, buying 3000 for $900 each and immediately selling them for $1200. Net profit: $900,000.

If you'd taken the cash you'd have $300,000.

If you'd taken the cash and immediately invested all of it in NFLX (and then sold them at the same time as the first example), you'd have $400,000.

[virgilp]

> If you'd taken the cash and immediately invested all of it in NFLX, you'd have $400,000.

But you can take the cash and immediately invest it all in NFLX options. That should be the baseline for comparison, when answering "why would one pick options vs cash"?

I'd imagine you _must_ have some benefits to pick options. Perhaps tax treatment is better; perhaps you pay less fees than buying them yourself. But still, there must be some incentive to pick NFLX options from the company, instead of picking whatever options you want from your broker.

(also, the flip side to your example: if NFLX drops 1% because of market conditions outside of your control, and the options are close to expiration, you now don't have $297000 .... you now have $0).

[fastball]

You're going to get a better strike price from the company than from the market.

> (also, the flip side to your example: if NFLX drops 1% because of market conditions outside of your control, and the options are close to expiration, you now don't have $297000 .... you now have $0).

Yes indeed, that is why options are a risky investment and no company pays people entirely in options.

[laurencerowe]

At least when I was there the options cost 40% of the strike price (whatever the current market price was at time of issue). The other difference is that you shift the income tax to time of exercise.

[fastball]

Yeah my numbers were made up, 40% of strike price does sound more reasonable (and obviously provides less leverage, but still some). It being pre-tax also helps with leverage vs taking cash.

Another benefit of the company's options is that they have a 10 year term, vs most market options which expire in < 1 year. You can get LEAPS but those are still max 2-3 years.