Intel freezes top salaries, re-prices worthless options

Revised employee incentives

Underwater stock options are those above the current stock price. For example, Intel's stock, which traded Monday afternoon up 55 cents to $15.60 amid a broad market rally, would mean those options priced above $15.60 would be out of the money or 'underwater.' Via agreements with their employers, employees typically exercise options to buy at a low price, then sell, after any embargo period, when the stock is priced higher, netting a capital gain.

Intel says it needs to change its option policy to provide retention and productivity incentives for engineers, scientists, and others working on multi-year projects.

Stock Analysis: Intel said the new options program will have about the same fair value as those surrendered, Reuters reported Monday, and is also cost-neutral, since it had accounted for the cost of the options when they were granted.

Is Intel a Buy here? Yes, but only for high-risk investors. The company has cut more than 20,000 employees and lowered costs related to its employee retirement plan, but it still faces strong headwinds from falling demand for personal computers amid the U.S. and global recessions. Further, while the rationale is clear behind the option policy change, yours truly may pull the Buy recommendation if something irregular appears after reviewing the plan in full.

Therefore, high-risk investors only should buy just a 25% position (one-quarter) now, wait, then buy a 25% in three months, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your INTC position in the first half of 2009.

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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.