How Steve Jobs Lost Over $4 Billion

As a former options trader (market maker) on both the Pacific Stock Exchange and the Chicago Board Options Exchange for a total of eleven years I have seen some bad options trades. I have made some myself.

Until 3/19/03 the worst and most expensive options trade I had ever seen was done by a market maker on the CBOE. This particular market maker was short enough puts on the day of the 1987 crash that he lost approximately $65,000,000 in one day.

However on 3/19/03 Steve Jobs relinquished 27,500,000 employee stock options (ESOs) on Apple in exchange for 5,000,000 shares of restricted stock valued at the time at 14.95 per share or approximately $75,000,000. Of the 27,500,000 ESOs, 7,500,000 were exercisable at 18.30 with an expiration date of 10/19/11 and 20,000,000 were exercisable at 43.59 with an expiration date of 1/12/10.

On Feb. 28, 2005 the stock split 2 for 1, therefore increasing the ESOs to 55,000,000. The exercise prices would then have been 9.15 on 15,000,000 and 21.80 on 40,000,000. The amount of shares Mr. Jobs had went from 5,000,000 to 10,000,000.

As of Friday, 5/25/07, Apple is trading for $112 per share. Therefore the value of the 10,000,000 shares assuming he still owned them all would be $1.12 billion.

However the value of the options would be far greater had he held them until now. The intrinsic value of the deeply in the money ESOs trading at 100 delta would be as follows: (112 - 9.15 x 15,000,000 = 1.54 billion) plus (112 - 21.80 x 40,000,000 = $3.6 billion) for a total of $5.14 billion.

So the exchange of the ESOs for the restricted cost Mr. Jobs over $4 billion. This is the most expensive and worst options trade ever made.

Disclosure: none

AAPL 5-yr chart:

Comments

[bluebox:]

1) He was a billionaire before this "trade".

2) He is a very successful multi-billionaire now.

3) Spending a billion dollars (as opposed to "losing" a billion) takes a very, very long time and isn't easy. (Even I know that, and I'm a pauper.)

4) Considering those options are a part of the ones involved in the past year's "scandal", relinquishing them for restricted stock helped him keep his job (and current shareholder value) intact.

The last point alone probably makes it the <b><em>bes... options trade ever.

So, your point is...?

2007 May 29 10:56 AM

[pegoss:]

read "accidental empires". Jobs is one of us...He doesn't/hasn't worked for money in a long time... that makes him the "most dangerous guy in the Valley". Sleeping under the kitchen table at a commune in Oregon he learned all he needed to know about business as fellow hippies snuck into the kitchen to raid the cookie jar at night when they thought no one was watching...

anyway, interesting story, but I'll bet he had good reasons for what he did... even if, like most of us can relate to, it was one of those "it seemed like a good idea at the time" things... since the author is comparing his trades with Steve's I guess I'd ask: what are you worth Big Boy?

2007 May 29 06:49 PM

[Jon T:]

What I would like to know is why did he relinquish those options?

Did he have to? Was he being generous to Apple/its shareholders? Or what?

2007 May 29 01:49 PM

[matthewbalding:]

bluebox, man, you are one brainwashed C. of Mac dude. I don't think you're implying that Jobs made this most expensive trade in history INTENTIONALLY to avoid SEC prosecution, but if he did, then he's an idiot for getting into a position where he had to give up over $4bn to stay out of trouble. That doesn't make this a "good" trade. If you're thinking it was just fortuitous that his $4bn.-losing trade swayed SEC prosecutors and helped him off the hook because he did not profit from the wrongdoing, that sounds about right, but in no way does that make this a "good" trade. Corporate misgovernance followed by a fortuitous loss of $4bn is precisely the "worst and most expensive trade ever".

As for your points 1-3, all irrelevant to whether this was an expensive or "worst" trade. Whether you're Trump or a pauper, a loss is a loss.

pegoss, you and bluebox are of the same ilk. I've seen this type of post hundreds of times, in everything from tech discussions about OSX coding to Apple product rumors to discussion of design features. The Church of Mac person always comes in at the end saying "but they have their reasons for [the software bug, or the lack of a feature which appears in Windows and Linux versions of similar apps, or the choice to leave out something that many users would like and use, or the pricing or timing or marketing or whatever]. Yeah. The bad stuff and mistakes are done "to help us" or because it's better that way due to Steve's knowing all about it and planning it that way and having his reasons. Can't do this in OSX? Then what you want to do is wrong. Feature doesn't work? You must be doing something wrong. Lose $4bn and luckily avoid SEC prosecution? All planned, boys, all planned--and Steve is thinking of us. If he'd been prosecuted, it would have hurt shareholder value in our Apple and we are all working together to keep the Church alive. Him, by raking in billions, and you, by buying, buying and buying, then going online to explain to people that the problem or issue is really due to their lack of understanding and actually good for them.

Let me close by saying, "So...your point?" And "Reading your post, you're probably misunderstanding, you need to read the article again and listen to what it says". And how about "Your issues sound like you're doing something wrong, the Market/SEC "just works"...the market had its reasons and this was done to help Steve and us by showing that corporate/accounting mismanagement and corruption is illegal and if you lose about $4bn, maybe they don't prosecute because you've clearly taken a huge fall."

Sheesh. I don't usually post like this, but when I see the C. of Mac enter the options market discussions, then I couldn't stop myself.

Yeah, I have a Mac and it's a nice computer. But I don't belong to the Church.

2007 May 29 11:17 PM

[bluebox:]

Matt,

Sheesh. I don't usually reply to posts like this, but when I see the Assumption That Someone Is A Cult Of Mac Person thread in your "reasoning", it becomes apparent that you've lost all objectivity.

1) Jobs is essential to Apple's success, like him or not, as well as to share<em>holders... (like me), and even options traders (apparently like you). If he recognized something was not right about the options grant and exchanged them for restricted stock, and was still able to avoid problems, so much the better. Shareholders were not harmed.

2) I don't care <em>what</em&... it was that caused Jobs to relinquish the options, conscience or otherwise, but <em>the fact that he did potentially kept him out of hot water</em>, enough so that he retained his position. Shareholders certainly benefit from this.

3) I never said anything about how "OSX can do this and Windows can't" or anything of the sort. You're the one who brought up the Apple vs Microsoft b.s., not me. Your insecurities regarding what OS you think is best is not a part of my discussion. I only care that my investments remain viable, and Apple has been that many times over. Let me say it one more time; Computer Platforms Are Not Religions.

4) Last, I have to ask you (and Mr. Wollney); Just how did Jobs "lose" 4 billion <em><b>tha... he never had in the first place</b></em... Stocks (and Options on them) are Pieces Of Paper. Worthless until converted into cash. Likewise, if you are handed Stock or Options, you've invested nothing of your own money, and therefore lose nothing if you don't sell or exercise them; you simply lose the opportunity.

So tell me, O Genius Options Traders Matt And Ray, please explain again, just how did Jobs "Lose Over 4 Billion"?

(Yeah, I have several Macs, a Windows and an Ubuntu Linux box. See, I do web development and don't have any Church at my workplace or home.)

2007 May 30 08:15 AM

[John Olagues:]

Ray:

Good article:

However, you forgot to mention that Jobs sold over 4 million of those post split restricted stock on March 19, 2006 when the restricted shares vested. Apparently he needed the money to pay his taxes. So his actual profit on the restricted shares is reduced by about 49 points on 4 million shares. Therefore the $1.12 billion figure should be reduced by about $200,000,000.

The heat from the FEDs seems to be off Jobs and other Silicon Valley Icons for back dating and other scams. I wonder if there was a correlation between the firing of U.S. Attorney Ryan and the reduced heat.

JO

2007 May 30 12:08 AM

[Paul Meisel:]

I think that there is a conundrum here:

It would appear that Jobs doesn't really need to work for money and doesn't deeply care about it...

Yet he has done some dumb things that probably cost him some money and got him some bad press if not in trouble....

I think he is probably getting some bad advice from somebody.

2007 May 30 09:28 AM

[Sr. Pessimist:]

Jobs is different from other CEOs. He is Apple. Apple is nothing without him innovating the valuables for them to churn out. He can just dump a billion here or there and it doesn't matter to him. He doesn't watch money in the same way that others do. He can always make more. He already knows how. He probably doesn't care about a billion here or four billion there. That's why he keeps cranking away at his profession. It's really not about the money. If it was, he would have retired at his first hundred million and vanished.

2007 May 30 02:45 PM

[Sr. Pessimist:]

There's really no reason for a billionaire to have his sleeves rolled up unless he doesn't do it for the money.

2007 May 30 02:47 PM

[Ray Wollney:]

Thank you all for your comments. I had no idea my article would stir up so much passion. I would like to say that my article in no way is attacking Mr. Jobs or his ability to run his company. I'm sure he is a top notch CEO.
However if he had not made the decision that he made and exchanged the ESOs for the restricted stock he would have made well over 5 billion at this time instead of just over 1 billion. It turns out that he possibly was a better CEO than he even thought. He obviously had no idea the stock would soar the way it has. If he had it certainly seems to me that he would not have made the trade.
I don't think he ever dreamed that the post split ESOs exercisable at 21.80 would ever be "in the money".
Certainly not a 100 points "in the money" which at one time today they would have been. So whether he needs the money or wants the money is irrelevant to the fact that this is the most expensive options trade ever made.
Ray Wollney

2007 May 31 09:14 PM

[Editor, myS...:]

In "Steve Jobs' Bad Bet" (Fortune, March 19, 2007, page 67), columnist Geoff Colvin takes a somewhat similar look at his stock grant exchange.

The reality is that even visionary CEOs do not fully understand the upside value of their stock options. Once options are underwater, executives and employees have trouble seeing that they still have value given the number of years until the options expire (usually 10 year term). Many rank-and-file employees and managers who traded in their underwater options a few years ago for a smaller number of repriced options or restricted stock are likely feeling real regrets. Given the market's rise in the past few years, particularly for tech companies, those earlier options may now be substantially in the money.

Bruce Brumberg
Editor-in-Chief
myStockOptions.com

2007 Jun 01 12:31 AM

[Ray Wollney:]

Bruce,

Thank you very much for your comment.

Ray Wollney

2007 Jun 02 11:04 AM

[dgsiemer:]

If we all knew how much our stock options would be worth in the future, we'd know exactly when to sell. That's not how it works. Sometimes, the stock goes up. Other times, the stock goes down.

Many of our clients with employee stock options have lost money in bear markets when they exercised their options, but didn't sell them right away. (You have to pay taxes when you exercise options, even if you haven't sold them yet.)

Sometimes, selling (or exchanging shares) now pays off.

2008 Aug 07 04:41 PM