What Is Bullet Dodging?

The term bullet dodging refers to an unethical employee stock options practice that delays the release of the options until a negative piece of news involving the company is made public, thus causing the stock's price to fall. Because an option's 澳洲幸运5开奖号码历史查询:exercise price is linked to the underlying stock's price when it is issued, waiting for the stock pr♋ice to drop allows option holders to benefit from a lower exercise price.

How Bullet Dodging Works

Employee stock options are a popular perk that some employers provide for their employees as part of their 澳洲幸运5开奖号码历史查询:benefits packages. They are just another form of compensation that employees—executives and other employees—may receive along with their annual or hourly salaries. Although they are quite popular, instances of bullet dodging are often controversial and are considered by some to be a form of 澳洲幸运5开奖号码历史查询:insider trading.

This process enables employees to benefit from a lower exercise price—the price where the 澳洲幸运5开奖号码历史查询:underlying security can be bought or sold when put options or calls may be traded—which increases their chances of making a profit. This defeats the purpose of options-based 澳洲幸运5开奖号码历史查询:compensation, which is meant to reward employees for helping to increase shareholder value. The option holder, who is usually a member of the company's management, ends up benefiting from potentially market-moving information that is not avaꦺilable to the public.

Bullet Dodging vs. Other ඣTypes of Controversial Employee Stock Option Practi💜ces

Bullet dodging isn't the only unethical practice companies have at their disposal when they grant stock options. Rather than move the date of the employee option around negative press releases, some companies specifically plan negative news to be released just prior to the set employee option date. Additional practices companies use include spring loading and backdating.

Spring Loading

Spring loading, for example, is another similar controversial practice. It occurs when options are granted just before the company reports really good news—the opposite of bullet dodging. It allows employees to reap the benefits and profits from any good news that comes from a company. Just like bullet dꦉodging, spring loading is also legal but considered controversial by some.

Backdating

Another fraudulent practice is known as options 澳洲幸运5开奖号码历史查询: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 much more difficult after the 澳洲幸运5开奖号码历史查询:Sarbanes-Oxley Act of 2002 made it a legal requirement for companies to report the granting of options to the 澳洲幸运5开奖号码历史查询:Securities and Exchange Commission (SEC) within two business days.

Example of Bullet Dodging

Suppose that XYZ Corporation planned to grant stock options for its 澳洲幸运5开奖号码历史查询:chief executive officer (CEO) on May 7, 2007. The company is aware it will fail to live up to its 澳洲幸运5开奖号码历史查询:earnings forecasts when they are published on May 14, and t🌸he share prices will likely fall ܫas a result. By moving the options-granting date to May 15, the CEO will likely be granted a lower exercise price than would be the case if the option were granted on May 7.