---
title: Understanding Scenarios Analysis
description: Learn how different equity compensation types respond to stock price movements and understand the difference between linear and leveraged instruments.
---

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November 12, 2025

# Understanding Scenarios Analysis

## Learn how different equity compensation types respond to stock price movements and understand the difference between linear and leveraged instruments.

### What is Scenarios Analysis?

Scenarios provides a visual analysis demonstrating how different equity compensation types respond to stock price movements, ranging from -80% to +80%. This analysis reveals the fundamental differences between linear equity instruments and leveraged equity instruments, enabling clients and advisors to understand risk exposure and potential outcomes across various market conditions.

### Linear vs. Leveraged Instruments

#### Linear Instruments

Linear instruments include:

- Stock owned outright
- RSUs (Restricted Stock Units)
- ESPP shares (Employee Stock Purchase Plan)

**Characteristics:**

- Exhibit 1:1 correlation with stock price movements
- Delta of 1.000, meaning every 1% change in stock price produces exactly 1% change in position value
- No time decay
- No volatility impact on valuation

#### Leveraged Instruments

Leveraged instruments include:

- ISOs (Incentive Stock Options)
- NSOs (Non-Qualified Stock Options)

**Characteristics:**

- Variable leverage that changes based on multiple factors
- Variable delta ranging from near 0 when deep out-of-the-money to 1.0 when deep in-the-money
- Time decay that accelerates as expiration approaches
- Volatility sensitivity that increases or decreases their value

### Understanding Options Leverage

Options create leverage through their strike price mechanism, with leverage typically ranging from 1.1x to 1.25x or higher. A 10% stock price movement might produce a 12% or 15% change in option value, magnifying both upside potential and downside risk.

#### When Leverage is Maximum

Maximum leverage occurs when options are at-the-money or slightly out-of-the-money.

#### When Leverage Diminishes

As options move deeper in-the-money, the leverage effect diminishes—the leverage converges down toward 1.0x and the option behaves more like owning stock. The deeper in-the-money an option goes, the more the leverage juice has been squeezed out, with the option eventually moving nearly in lockstep with the underlying stock.

### How the Visualization Works

The scenarios tab displays a line diagram showing each equity compensation type's value across the stock price range.

#### Horizontal Axis

Shows percentage stock price movement from -80% to +80%

#### Vertical Axis

Shows current dollar value of each position

#### Position Lines

Each equity compensation position displays on its own line representing that specific position's current dollar value and how it responds to stock price movements. A $500,000 option position displays separately from a $50,000 RSU position, with each showing its respective value changes across the price movement range.

#### Dollar Impact Differences

While percentage movements remain constant for linear instruments, absolute dollar changes differ based on the starting stock price. A 20% move on an $80 stock produces different absolute dollar impact than a 20% move on a $100 stock, illustrated by different dollar values on the vertical axis.

### Market Assumption Integration

The scenarios diagram connects to market assumptions established earlier:

**Current Stock Price** Serves as the baseline where all scenario lines are measured

**Growth Rate Assumptions** Help identify the most probable region of outcomes within the full range shown

**Volatility Assumptions** Affect the shape and value of options curves, with higher volatility increasing option values across price points

### Related Articles

- [Understanding Stock Price](https://support.grantdequity.com/understanding-stock-price?hsLang=en)
- [Understanding Volatility](https://support.grantdequity.com/understanding-volatility?hsLang=en)
- [Understanding Growth Rate](https://support.grantdequity.com/understanding-growth-rate?hsLang=en)
- [Understanding Concentration Analysis](https://support.grantdequity.com/understanding-concentration-analysis-needs-image?hsLang=en)

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