Bullet Dodging (Stock Options) - Explained
What is Bullet Dodging when Granting Stock Options?
Written by J. Mance Gordon
Updated at April 20th, 2024
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What is Bullet Dodging?
Ordinarily, bullet dodging has to do with actions done to avoid an unpalatable situation or avoid a gory circumstance. When used in a financial sense, bullet dodging is a tricky approach of granting employee stock option in which the release of the option is delayed until the prices of stocks owned by the company drop.
Bullet dodging as carried out by many companies is a questionable act. In this situation, companies intentionally delay the granting of the options until an undesirable situation in the company is made public. Hence, because the exercise price of stock owned by the employee is related to the underlying price of the stock, the holder is then left to a low exercise price due to decline in stock price.
How Does Bullet Dodging Work?
If a company grants an employee stock option despite being aware of a potential drop in stock price or bad news involving the company is an instance of a bullet dodging. However, there are some cases where a company grants options if good news is about to be made public, this is considered insider trading, because only a selected few can access this. In cases of bullet dodging, employees enjoy lower exercise price contrary to the potential benefit that options holder should benefit from.
The employees involved are often members of the management of a company, such as the CEO or administrative manager. Although bullet dodging is often regarded as a dishonest or shady act, it is legal. Its legality is due to the fact that board members who grant the options are often pre-informed about liely occurrences in stock prices or the company at large.
Also, a legal requirement under the 2002 Sarbanes-Oxley Act is that companies should report granting of options to SEC within two business days. For instance, bullet dodging is a situation where Company A which initially planned to grant stock options for its Executive manager at an earlier date, lets say June7, end up delaying the granting of the option till June 15 if its earning projections will encounter decline by June 14.