IFRS 2 Share based payments

Option price is the “cost” of the option. If you were to trade in shares on the stock exchange, you get greater leverage if you trade in options. Say 10% of the market price will buy you an option. This means that for a $1,000 investment, you shall receive 10 times more options than shares.

Strike price is the amount that you pay when you exercise the options – it’s actually also referred to as the exercise price

So, you buy an option to buy a share with a market price of $2.50 and you pay 25 cents to buy that option that gives you the right to buy the share sometime in the future for $2.50

If the market value goes up to say $2.60, then you exercise the option and buy the share for $2.50 and you’ve just paid $2.50 + 25 cents and you have a share with a market value of $2.60

Not good business!

However, if the market value increases within the option period to say $2.85 then you exercise the option at the strike price (exercise price) of $2.50 and you’re “in the money” because you now have a share worth $2.85 that cost you $2.75 ($2.50 + 25 cents)

Giving options to employees is an expense of the company – just because it doesn’t involve a cash element doesn’t make it any less of an expense. How much to charge to PorL? How many shares have vested? What’s the option price? Multiply one by the other gives the expense for the year

Does that do it for you?