Options Backdating: Definition, Purpose & Implications

Options backdating is a practice that is sometimes performed by companies in order to provide them with an option with a date in the past. Here are the basics of options backdating and how it is used. 

Options Backdating

With a stock option, you are typically able to purchase a stock for what the price was on the day that you purchased the option. With options backdating, you are given an option on a company stock from a date that was in the past. By doing this, the company can select a date in which the value of the stock was trading low. That way, the option will actually be more valuable than if it was offered on the current day. 

Purpose

This type of transaction is often used as an incentive for company executives. The company will do this so that the executive will have an incentive to increase the value of the company. When the executive performs well, the company is going to improve and the value of the company's stock is going to increase. As a reward for helping out the shareholders in the company, that executive is given an option that is backdated to a date in the past in which the stock was trading at low prices.