Sara’s Options Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Organizational Approach for Sara’s Options

How should Sara value the Clear Lake options if she could trade them on an exchange?

a) Necessary Variables

b) Initial Value Estimate

NECESSARY VARIBLE

The necessary variable that Sara should consider in order to undermine the value of the Clear Lake options are,

Stock Price:

The most essential component in choice of an option is the price of the underlying stock. Call options give you the right of buying the stock at a preordained strike price as now when the price increases; therefore, the difference of the current price and the strike price will be the net benefit that the option will bring. Alternatively, a Put option gives you the opportunity to sell the shares in the market before purchasing it; however, the benefit will arise if the share price of the stock falls.

Clearly, Lake is been provided a Call options at a strike price that will be the current market price at the day Sara joins the company. Consideration has to be given to the fact that during her stay how much the stock price can rise that will provide her with the maximum benefit.

Time:

An alternate basic element in option evaluating is time esteem. As the logbook moves around the termination date, therefore, the option continuously loses time worth, even as inherent quality may climb and fall. An option with a few months of expiry date has a superior opportunity to increase in worth than an option that will terminate in simply a couple of weeks or days. Other consideration is the vesting period, how much time does Sara has to wait before the options are made exercisable.

Market Factors:

Supply and interest speaks as an alternate discriminating element doe to any financing that is traded on an open market. This element depends to a great extent on mogul assessment. On the off chance that option merchants are reckoning to lift news from Clear Lake; the call options regarding this stock are going to be higher interest and their value will climb, far beyond the natural and time values. Likewise, stock financial gurus who don't ordinarily exchange options may be entering the option market in the event that they feel the transient prospects for a specific stock are great or awful.

Stock Volatility:

For the most part, options focused around unstable stocks are worth more than options on generally lethargic imparts that don't change incredibly in value from normal. On the off chance that a stock's value moves quickly in either bearing, the option value move simultaneously with an amplified rate of progress. The speedier value move, the higher the potential benefit and profit for the speculation (and, obviously, the more prominent the danger of losing your whole stake). It's not uncommon for options to two fold or triple in value in a couple of days when a stock makes a real move and option brokers will pay a higher premium for that potential windfall.

INITIAL VALUE ESTIMATE

Considering the fact that the benefit generated form an option is completely based on the movement of stock price of the company; which is heavily influenced by the market perception of the company and economic conditions of the market that is dynamic in nature. It seems very unrealistic that any initial value estimate will give an accurate value of the stock in the future as even by using the Binomial tree and Black Sholes model even have their limitations. An initial value estimate is only good to determine what range the stock price may be in the future but to calculate an accurate figure is not a possibility.

Sara should use the Initial value estimate to determine what value can be achieved by the stock and then compare it with the variables present in the market to see if that value can be achieved.

What factors might cause Sara’s Clear Lake Options to have a different value than exchange traded options?

An option exchanged on a directed trade where the terms of every option are institutionalized by the trade. The agreement is institutionalized so that underlying stake, amount, close date and strike cost are known ahead of time. Over-the-counter options are not exchanged on trades and take into account the tailor made terms of the option contract. Exchange-traded options are also known as "listed options".

The benefit of trade exchanged options include: liquidity of the options, institutionalized contracts, brisk access to value and the utilization of clearing houses by trades. The utilization of clearing houses ensures the option contract will be satisfied, while with over-the-counter options the capability to practice the agreement is reliant on the capacity of the other gathering to meet the commitment.

Therefore, in order to make the option valuable to Sara, the commitment against the option has to be fulfilled, that is to stay with the company .................................

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