Deriving Options

What do olive presses, Las Vegas, and random walks have in common? The Black-Scholes Option Pricing model! A really interesting Veritasium video walks through a brief history of options and the mathematics behind the Black-Scholes model. And while the video does a good job of explaining option basics, it also discusses some of the beauty behind the math.

GM's Electric Option

A recent Wall Street Journal article discusses GM's managerial option to abandon gas-powered automobile manufacturing and convert to an all-EV product line. In order to achieve this end, GM plans to spend $27 billion by the middle of the decade to convert its plants to manufacture 30 EV models, as well as develop driverless vehicles. Currently, EV vehicles generate only 2 percent of GM's sales and no profits. Because the manufacturing process is so different, GM plans to gut plants, basically revamping everything inside the outer walls. GM's plan is to manufacture only EV vehicles by 2035, a massive change in the company's manufacturing capabilities.

Retirement Options

When dealing with option valuation, you should always remember is that an option always has value until it is exercised or expires. And, more importantly, an option can never have a negative value. COVID-19 lockdowns and the resulting economic uncertainty have affected many colleges and universities. In August, a top private university offered its faculty members over 70 a chance to accept a buyout if they retire by June 2021. In response, the faculty responded negatively to the buyout plan, essentially arguing against being offered something of value, the option to retire with a buyout, for nothing.

Chipotle's Vanishing Options

In 2015, Chipotle stock hit its peak price of about $758 per share, and executives owned stock options worth millions. Since then, the stock has plunged more 60 percent and executives have lost millions. For example, CEO Steve Ells lost $37.5 million worth of stock options, CFO Jack Hartung lost $34.8 million, and CMO Mark Crumpacker lost $10.7 million. In total, the four top executives at Chipotle, including former co-CEO Montgomery Moran, lost $225 million during the stock price plunge. These options were all granted before 2014 as Chipotle stopped issuing stock appreciation rights after shareholders criticized them as being too large and not linked to performance.

VIX Volatility

The VIX, which measures the volatility of the S&P 500, has recently had an increased volatility, reaching levels not seen since the financial crisis of 2008. The level of the VIX is still in the area that generally occurs when the economy is in a recession. A JPMorgan analyst argued that the increased volatility was the result of price-insensitive traders who had "trend following strategies (CTAs), risk parity portfolios, and volatility managed strategies", all of which served to increase market volatility.