Roger Wohlner is a financial advisor and writer with 20 years of experience in the industry. He specializes in financial planning, investing, and retirement.
Options allow for potential profit during both volatile times, and when the market is quiet or less volatile.
When used appropriately, these options can be worth a lot of money to you. Employee Stock Option Basics With an employee stock option planyou are offered the right to buy a specific number of options are paid of company stock, at a specified price called the grant price also called the exercise price or strike pricewithin a specified number of years.
Article Reviewed on July 31, Michael J Boyle Updated July 31, An option contract's value fluctuates based on the price of the asset underlying it, such as a stock, exchange-traded fund, or futures contract. Each one of these situations affects the intrinsic value of the option. The amount of time remaining before the option contract expires also plays a role in the value of the option, which in turn affects how high or low a price—the premium—the buyer is willing to pay for the option. The buyer could exercise their right under the option contract and buy the underlying asset for less than its current value.
You cannot exercise your options before the vesting date or after the expiration date. You can keep the 1, shares or sell them. Cashless exercise options are paid You exercise your options and sell enough of the stock to cover the purchase price.
The brokerage firm makes this happen simultaneously.
Objectives[ edit ] Many companies use employee stock options plans to retain, reward, and attract employees,  the objective being to give employees an incentive to behave in ways that will boost the company's stock price. The employee could exercise the option, pay the exercise price and would be issued with ordinary shares in the company. As a result, the employee would experience a direct financial benefit of the difference between the market and the exercise prices.
You are left with shares of Widget which you can either keep or sell. You are left owning a total of 1, shares of Widget which you can either keep or sell.
This is not necessarily the case for incentive stock options. With proper tax planning, you can minimize the tax impact of exercising your options. Your employee stock option plan will have a plan document that spells out the rules that apply to your options.
Get a copy of this plan document and read it, or hire a financial planner that is familiar with these types of plans to assist you.
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There are many factors to consider in deciding when to exercise your options. Investment risk, tax planning, and market volatility are a few of them, but the most important factor is your personal financial circumstances, which may be different than those of your co-worker.
Should You Keep the Stock? Keeping too much company stock is considered risky. Corporate executives need to consider this in their planning and work to diversify out of company stock.