How do you calculate diluted shares with the treasury stock method?

The treasury stock method estimates how many extra shares options would create. I start by listing options and warrants and keep only those that are in the money, meaning their strike price is below the current share price, because no one would exercise an option to buy at a price above the market.

Then I assume those options are exercised and the company uses the cash it receives to repurchase shares at the current price. Say a company has 100M basic shares, 10M options with a $10 strike, and a $20 share price. Exercise brings in $100M, which buys back 5M shares at $20. So the net new shares are 10M minus 5M, or 5M, and diluted shares are 105M.

Beyond options, RSUs have no strike price, so I add them in full. Convertible bonds use the if-converted method: if the share price is above the conversion price, I add the shares from conversion and remove the bond from debt. For equity value, I multiply diluted shares by the share price. In an acquisition, I would use the offer price instead of the market price, which can bring more options into the money.