Friday, January 30th, 2015

What’s the likelihood of $100 in a randomly chosen S&P500 security outperforming $25 in the index over 8 years

With an employee stock option eight years at $ 75 for a stock trading at $ 100, you can exercise and have to invest $ 25 (ignoring taxes). It is clear that investment in a broad index like the S & P500 is less risky than investing in a single security in it, but you will have to invest only $ 25 vs giving option in effect, a share of U.S. $ 100 in market. If an interest in the S & P500 was 100% correlation w / the index then retain the option should return much more (if the security index and double in eight years could be completed with $ 125 profit to the strategy wait, $ 50 of benefit in the early exercise strategy). Instead of a Black-Scholes theoretical calculation, I am interested in the frequency historically one would have been better with one against the other. Over eight years we intuitively feel that the early exercise would lose at least 80% of the time, on average lose badly and rarely win big – more than 1 year, maybe lose 60% of the time, but with the diversion of large and winning big quite frequently. Data?

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One Response to “What’s the likelihood of $100 in a randomly chosen S&P500 security outperforming $25 in the index over 8 years”
  1. DeZZy says:

    I think rising inflation will probably effect both investments over 8 years, especially if interest rates were to rise (to tackle inflation).. find a gd 3 year fixed bond and re-invest at maturity

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