Bullet Dodging

What Is Bullet Dodging?

The term bullet dodging alludes to a deceptive employee stock options practice that postpones the release of the options until a negative piece of information including the company is unveiled, consequently making the stock's price fall. Since an option's exercise price is linked to the underlying stock's price when it is issued, waiting at the stock cost to drop permits option holders to benefit from a lower exercise price.

How Bullet Dodging Works

Employee stock options are a famous advantage that a few employers accommodate their employees as part of their benefits bundles. They are just one more form of compensation that employees — executives and different employees — may receive along with their annual or hourly salaries. Despite the fact that they are very well known, cases of bullet dodging are frequently disputable and are viewed as by some to be a form of insider trading.

This interaction empowers employees to benefit from a lower exercise price — the price where the underlying security can be bought or sold when put options or calls might be exchanged — which increases their possibilities creating a gain. This invalidates the point of options-based compensation, which is intended to reward employees for assisting with expanding shareholder value. The option holder, who is normally a member of the company's management, winds up benefiting from possibly market-moving information that isn't accessible to the public.

Bullet dodging might be disputable, however it is legal the same length as the board members who approve the options grant are informed in advance.

Bullet Dodging versus Different Types of Controversial Employee Stock Option Practices

Bullet dodging isn't the main deceptive practice companies have at their disposal when they grant stock options. As opposed to move the date of the employee option around negative press releases, a few companies explicitly plan negative news to be released just prior to the set employee option date. Extra practices companies use incorporate spring loading and backdating.

Spring Loading

Spring loading, for instance, is another comparative dubious practice. It happens when options are granted just before the company reports truly uplifting news — something contrary to bullet dodging. It permits employees to receive the rewards and profits from any uplifting news that comes from a company. Just like bullet dodging, it is additionally legal however thought to be disputable by some to spring loading.

Backdating

One more fraudulent practice is known as options backdating, in which options are granted with a date prior to the actual issuances of the option, so the exercise price can be set at a lower price than that of the company's stock at the granting date. This has become substantially more troublesome after the Sarbanes-Oxley Act of 2002 made it a legal requirement for companies to report the granting of options to the Securities and Exchange Commission (SEC) inside two business days.

Illustration of Bullet Dodging

Assume that XYZ Corporation planned to grant stock options for its chief executive officer (CEO) on May 7, 2007. The company knows it will fail to satisfy its earnings conjectures when they are distributed on May 14, and the share prices will probably fall thus. By moving the options-granting date to May 15, the CEO will probably be granted a lower exercise price than would be the case on the off chance that the option were granted on May 7.

Features

• This cycle empowers employees to benefit from a lower exercise price which increases their possibilities creating a gain.
• Bullet dodging is an employee stock options practice in which the options release is delayed until a negative press release emerges, making the stock's price drop and granting employees an optimal entry point.
• Options holders wind up benefiting from possibly market-moving information not accessible to the public.
• Bullet dodging is a legal however questionable practice; a few doubters think of it as a form of insider trading.