How Are Stock Options Valued in a Divorce?

 Posted on June 30, 2023 in Property Division

Professionals may receive stock options as part of their compensation package. These are considered marital assets that are subject to equitable division in an Illinois divorce. There are several challenges associated with valuing these assets. The divorcing spouses often disagree about the value of stock options.

There Are Pricing Formulas that Can Be Used

For many employee stock options, you simply cannot look to exchange-traded derivatives as a pricing guide. The options are too customized, and the time horizon is too far into the future, to get any guidance from the market. Most options are valued using the Black-Scholes formula. This is an established methodology for pricing options that has been in use for five decades. This is the formula that is used in most divorces, although how it is used will be up for debate.

There Are Different Inputs Into the Black-Scholes Model

The Black-Scholes model considers the following inputs:

• The exercise price of the option
• The price of the stock
• Time remaining until expiration
• Implied volatility
• Interest rates

Implied volatility is an extremely important factor. The more volatile the stock, the more the option will be worth. Volatility can result in large differences in the price of the option, especially when there is a lot of time remaining until the options expire. Experts will often disagree about how to price volatility for an option. Obviously, the spouse who will be retaining the options will argue that they are worth less than the spouse who will be paid for them.

You Often Need a Valuation Expert

If your divorce is contested, you will need to support your own proposed valuation of the options. Your expert may provide evidence that justifies their own opinion, including the historical volatility of the stock and any pricing patterns in the market (if the options are listed on a public exchange). You cannot simply use a rough estimate or calculation. Your attorney would work with an expert who has detailed knowledge of derivatives.

Contact a Will County Divorce Attorney Today

Legal help is crucial if you are involved in a high net worth divorce. You will need to make critical decisions that can have large financial ramifications. You can reach out to a DuPage County family law attorney at Law Office of Ronald L. Hendrix, P.C. to schedule a free initial consultation. Our lawyers can be reached at 630-355-7776.

Source:

https://www.esofund.com/blog/dividing-stock-options-divorce