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| Spring Loading |
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A type of option-granting practice where options are granted at a time that precedes a positive news event. Since positive news typically causes the underlying company's stock to surge in value, timing an option grant to precede the public newsrelease will allow the option-holder to receive an almost instant profit.
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Spring-loading options is often a controversial practice. Since option strike prices tend to be derived from the grant day's stock price, on the day of granting the option it 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-loading options state that allowing the option holder, who is typically an executive from the company, an opportunity to gain, for all intents and purposes, 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. By then the option could be "out of the money" long before the investor could exercise it.
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