Backdating is the act of indicating an earlier date than the actual date of issuance, as in backdating a check. This is the exact opposite of postdating it, which would involve indicating a later date than the actual date of issuance.
Options backdating refers to the act of giving options that have been set at a date before the actual date on which these options contracts were issued. This is often done for the purpose of maximizing profit on these options, since these are normally set on dates on which the share prices are lower.
While the actual practice of options backdating may not be illegal, it could, in certain cases, be considered a tool for fraudulent activity. This is particularly true in cases of backdating which involve indicating dates during which stock prices were lower and declaring that the options were issued at the money (which means that the strike price is about the same as that of the underlying stock) as opposed to in the money (which means that the underlying stock price is lower than the strike price).
The use of options backdating may provide executives with higher income without the knowledge of shareholders, or could violate the option plan of the company. Although the use of options backdating in itself may not constitute a fraudulent act, it may be used to commit fraud, and has a generally negative public reputation. The Securities and Exchange Commission monitors and investigates reported cases of backdating in order to prevent any illegal action.
