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Stock prices change, however, and there is no guarantee that any stock price will ever be above the exercise price.
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.
This is a way of repricing options to make them valuable or more valuable when the option "strike price" (the fixed price at which the owner of the option can purchase stock) is fixed to the stock price at the date the option was granted.
In our example, backdating the options is the same as giving John Doe a check for ,000 -- without recording that ,000 on the income statement as compensation.
In addition to being illegal, backdating isn't always a sure thing.
The general reason companies backdate options is to create a lower exercise price, which in turn increases the probability that exercising the options will make more money for the optionee.
But if John's options are backdated, then his exercise price is only per share.
He pays the per share exercise price and can turn around and sell those shares on the exchange for each, netting a profit of per share, or ,000.