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Basic Question 0 of 20
Stock options are dilutive when the average market price of the underlying stock is greater than the strike price of the option. True or False?
User Contributed Comments 9
| User | Comment |
|---|---|
| raution | can someone explain the concept stated here. |
| pavlomel | example: You have an option to buy 1000 shares at strike price $25. Current market price is $50. Of course you exerise your option, so Company is forced to issue 1000 new shares to you. In return, you pay them 1000x25=$25000. Then, Company will use these $25K to buy back as much stocks from the market as they can at market price, which is $25000/$50=500 shares. Net effect is that number of shares on the market increased by 500 shares (1000 issued to you - 500 repurchased), hence dilution effect. If strike price is lower than market price, Company will always get less $ proceeds from you than it needs to buy back shares on the market. |
| rfvo | N1 Pavlomel!! |
| wankoo | Make it simple. Dilutive=More common stocks=Lower EPS so when stock options are dilutive, they should be lower than the market price. Thus, true. |
| jpducros | Stock options is like a Long Call. |
| moneyguy | Very clear example pavlomel. Thanks. |
| LoveIvie | thanks wankoo also |
| jonan203 | stock options are essentially call options and are only convertible if: Max(0,S-X); where S = underlying, X = strike the option is worthless if the strike is greater than the price of the underlying (S<X) and at expiration would not be executed for common in any instance where the underlying is greater than the strike (S>X), the option would be executed and any stock associated with such execution would dilute EPS |
| Freddie33 | Thanks Wankoo. And nice name lmao |
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Learning Outcome Statements
describe how earnings per share is calculated and calculate and interpret a company's basic and diluted earnings per share for companies with simple and complex capital structures including those with antidilutive securities
CFA® 2025 Level I Curriculum, Volume 2, Module 2.