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. Employee Stock Option - ESO

    A stock option granted to specified employees of a company. ESOs ...
  2. At The Money

    A situation where an option's strike price is identical to the ...
  3. In The Money

    1. For a call option, when the option's strike price is below ...
  4. Option

    A financial derivative that represents a contract sold by one ...
  5. Out Of The Money - OTM

    A call option with a strike price that is higher than the market ...
  6. Strike Price

    The price at which a specific derivative contract can be exercised. ...
Related Articles
  1. Options & Futures

    The Dangers Of Options Backdating

  2. Options & Futures

    Should Employees Be Compensated With ...

  3. Options & Futures

    The Benefits And Value Of Stock Options

  4. Options & Futures

    Why are options very active when they ...

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  3. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  4. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  5. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  6. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
Trading Center