Valuing Complex Stock Options Containing Reload Features

The need to value complex options containing reload features is becoming increasingly more common as such options become more proliferate. Traditionally, two types of valuation methods have been used: the intrinsic method and closed-form models, such as Black-Scholes. These methodologies undervalue options with reload features, a fact recently recognized by both accounting regulators and some courts which have sanctioned the use of binomial/lattice methodology. Such undervaluation can be costly to clients in litigation such as divorce cases. This study analyzes these alternative methodologies and reveals the extent of such undervaluation when the Black-Scholes method is used. It also provides evidence of the sensitivity of the resulting value to various assumptions required by binomial/lattice models.