Spring Loading

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DEFINITION

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 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.


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