Spring Loading

AAA

DEFINITION of 'Spring Loading'

An option-granting practice in which options are granted at a time that precedes a positive news event. Spring loading relies on the fact that positive news typically causes the underlying company's stock to surge in value. Timing an option grant to precede the public news release provides the option holder with an almost instant profit.

INVESTOPEDIA EXPLAINS'Spring Loading'

Spring-loading options is often a controversial practice. Because option strike prices tend to be derived from the grant day's stock price, on the day of granting the option should be "at the money".

Theoretically, executives should benefit from options-based compensation only if their performance has increased shareholder value. Therefore, critics of spring loaded options state that allowing the option holder to gain instant profit defeats the purpose of option-based compensation. However, others claim that the effects of spring loading are minimal, as most option grants have a vesting period, which prevents the holder from realizing his or her position for a period of time. In this case, the option might be out of the money long before the investor can exercise it.

RELATED TERMS
  1. At The Money

    A situation where an option's strike price is identical to the ...
  2. Out Of The Money - OTM

    A call option with a strike price that is higher than the market ...
  3. Employee Stock Option - ESO

    A stock option granted to specified employees of a company. ESOs ...
  4. Option

    A financial derivative that represents a contract sold by one ...
  5. In The Money

    1. For a call option, when the option's strike price is below ...
  6. Bullet Dodging

    A form of option granting in which the award of options is delayed ...
Related Articles
  1. Options & Futures

    The Dangers Of Options Backdating

    This form of executive compensation can pose serious risks for investors.
  2. Options & Futures

    Should Employees Be Compensated With Stock Options?

    Learn the good, the bad and the ugly sides of this type of payout.
  3. Options & Futures

    The Benefits And Value Of Stock Options

    The pros and cons of corporate stock options have been debated since the incentive was created. Learn more about stock option basics and the cost of stock options.
  4. Investing Basics

    Explaining Absolute Return

    Absolute return refers to an asset’s total return over a set period of time. It’s usually applied to stocks, mutual funds or hedge funds.
  5. Investing Basics

    How To Create Capital Protected Investment Using Options?

    Does "Capital-Protection" guarantee in an investment product sound attractive? Wait! Here's how you can create a better one for yourself, at low-cost!
  6. Options & Futures

    How to Make Money by Trading Index Options

    Index options are less volatile and more liquid than regular options. Understand how to trade index options with this simple introduction.
  7. Investing

    4 Structured Product Types Wealthy Clients Love

    High-net-worth investors find structured products appealing for a variety of reasons. Here's a look at four types.
  8. Mutual Funds & ETFs

    5 Disadvantages of Mutual Funds Compared to ETFs

    In the mutual funds vs. exchange-traded funds debate, ETFs have some clear advantages.
  9. Options & Futures

    Understanding Bull Spread Option Strategies

    Bull spread option strategies, such as a bull call spread strategy, are hedging strategies for traders to take a bullish view while reducing risk.
  10. Investing Basics

    Explaining Gamma

    Gamma is a measurement of how fast the delta of an option’s price changes after a 1-point movement in the underlying security.
RELATED FAQS
  1. Why are options very active when they are at the money?

    Stock options, whether they are put or call options, can become very active when they are at the money. In the money options ... Read Full Answer >>
  2. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  3. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
  4. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>
  5. What is the difference between derivatives and options?

    Options are one category of derivatives. Other types of derivatives include futures contracts, swaps and forward contracts. ... Read Full Answer >>
  6. How are rights distributed in a rights offering?

    In a rights offering, rights are distributed to shareholders based on the number of shares they already own. What Is a Rights ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Dog And Pony Show

    A colloquial term that generally refers to a presentation or seminar to market new products or services to potential buyers.
  2. Topless Meeting

    A meeting in which participants are not allowed to use laptops. A topless meeting organizer can also ban the use of smartphones, ...
  3. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  4. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  5. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  6. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!