The number of shares subject to option was 250,000 and the exercise price was (the trough in the stock price graph below.) Given a year-end price of , the intrinsic value of the options at the end of the year was (-) x 250,000 = ,750,000.
In comparison, had the options been granted at the year-end price when the decision to grant to options actually might have been made, the year-end intrinsic value would have been zero.
The company would then grant the option but date it at or near its lowest point.
Cases of backdating employee stock options have drawn public and media attention.
According to a study by Erik Lie, a finance professor at the University of Iowa, more than 2,000 companies used options backdating in some form to reward their senior executives between 19.
In this way, the exercise price of the granted option can be set at a lower price than that of the company's stock at the granting date.
This process makes the granted option in-the-money and of value to the holder.
Options backdating is the practice of altering the date a stock option was granted, to a usually earlier (but sometimes later) date at which the underlying stock price was lower.