Lower expected volatility reduces the fair value of an option and thus the reported expense. Using a higher volatility estimate results in higher expense and thus lower income. Can someomen explan this in other words? I know that high volatitly gives more value to an option but what is the relation here to to the net income…
well options have to be recorded at their FMV when they are granted, and expensed over the vesting life. Hence if we assume a higer volatility the FMV on the grant date is higher, since this is the value that gets allocated over the vesting period as a compensation expense net income is lower vis-a-vis a lower volatility on the same options.
there was a CPK post some-time ago that related DIVUTS to DUUUUD. that should solve your problem.
even if you dont remember divuts to duuuud, you can always reason. high volatility = higher prices for options whether be it put or call. so if prices are higher for options at the grant date, then your compensation expense is high. opposite reasoning for lower volatility. lower exp -->higher income