Stock options are confusing. What are they exactly? And how do you estimate how much they could be worth for prospects you research?

I will never forget when a new gift officer I once worked with came excitedly into our office with a Form 4 for one of his young prospects at a tech start-up. He had uncovered a multimillionaire! Trying to explain what options are and what they are not (stock holdings! actual, realized wealth) was difficult and, for him, deflating. As with many things, my understanding of all things securities-related is rudimentary at best, but it's something I do read about often as I'm researching insider prospects. 

A review of NEDRA News articles about options led to a 2003 article by Frederic Sinclair, linked below. Some things have changed in the past 13 years, but much of the basics remain the same. Check out his method for calculating the value of options. What method do you use to value options? Or do you not value them at all?  Discuss in the comments below!

Note that the website he mentions to learn more about stock options, mystockoptions.com, remains a good resource for learning some basics, although more advanced information is behind a paywall. You can also read more at Investopedia and Fool.com   

Evaluating Stock Option Awards - Frederic Sinclair.pdf

- S. Grivno