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iOptions Goes Where Microsoft, Google May Have Feared to Tread


Options remain a powerful recruitment and retention tool.

It's been over 9 years in the works, but iOptions took an important step toward realizing their business plan - one which would allow employee stock-option holders to use vested options as collateral for selling exchange-list options.

Currently, transactions (such as selling calls), would be deemed "naked" for purposes of the margin rules, and subject to a deposit of cash margin - effectively making the strategies cost-prohibitive and impractical.

iOptions has been working with the 2 lead options exchanges -- the International Securities Exchange (ISE) and the Chicago Board of Options Exchange (CBOE) -- to amend its margin requirements, and facilitate the ability of workers with vested employee stock options issued by publicly traded companies, to use those corporate options as collateral for writing call options on exchange-listed options on the same underlying security.

Last week, the Securities and Exchange Commission (SEC) published the proposed rule change, and it's now open to the 20-day comment period - a necessary step before it can go into affect. Joe Klein, President of iOptions, expects the rule to be passed and go into effect sometime in July.

Capturing Time Value

This rule has 2 main benefits: Employees will have the ability to hedge and lock-in a certain price of employer-granted options without having to actually exercise and sell the shares - a move that could have major tax implications. Second, by selling short an exchange-listed option, an employee will be capturing the time value that's awarded to exchange-listed options.

"iOptions transactions to employees will help close the 'value gap' between the shareholder-perceived cost of granting the employee stock options and the value employees ascribe to their options" says Klein.

For example: Assume an employee of Apple (AAPL) has 5,000 options that have vested, with an average strike price of $75 and 2 years until maturity (or when they must exercise them). With the stock trading around $125, he could sell 50 of the J $125 calls with a January 2011expiration could be sold for $25 a contract. That would provide an "extra" $25, or essentially lower the effective cost basis (exercise price) down to $50 a share.
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