Exercise price stock options definition


If you exercise your Microsoft option, you will buy Microsoft stock for the strike price, i. Even when the stock would be trading at or at 15 or at 1 dollar, the price for which you buy when you exercise this option is 20 of course it does not make sense for you to exercise the option if the stock is at 15, as the option would be out of the money , and you better buy the stock in the stock market for 15 rather than for 20 using your option.

It is not fixed as a permanent characteristic of the option, but it is determined in the market by the interaction of supply and demand for the particular option in the same way as market prices for other securities are determined in other markets. The market price of the option is the price you pay when you buy the option and the price you get when you sell the option. The market price of the option consists of two parts, intrinsic value and time value.

Time value represents the benefit of having the choice of exercising or not for a period of time. In general the longer the time period, the higher the time value other things being equal. Both intrinsic and time value can be zero — when both are zero at the same time, the option is worthless.

The market price or spot price of the underlying security is independent of the option. It is the price of Microsoft stock in the stock market in the example above. It is determined by supply and demand for the Microsoft stock itself the underlying asset, not the option. Therefore, it influences the market price of the option. Remember that options are derivative securities and by definition the price of a derivative security is derived from the price of its underlying.

If you don't agree with any part of this Agreement, please leave the website now. Tax treatment for each transaction will depend on the type of stock option you own and other variables related to your individual situation. For specific advice, you should consult a tax advisor or accountant. When it comes to employee stock options and shares, the decision to hold or sell boils down to the basics of long term investing. Is my portfolio well-diversified based on my current needs and goals?

How does this investment fit in with my overall financial strategy? Your decision to exercise, hold or sell some or all of your shares should consider these questions.

Many people choose what is referred to as a same-day sale or cashless exercise in which you exercise your vested options and simultaneously sell the shares. This provides immediate access to your actual proceeds profit, less associated commissions, fees and taxes. Many firms make tools available that help plan a participant's model in advance and estimate proceeds from a particular transaction.

In all cases, you should consult a tax advisor or financial planner for advice on your personal financial situation. It is great to have confidence in your employer, but you should consider your total portfolio and overall diversification strategy when thinking about any investment — including one in company stock.

There is no single answer to this. If a company remains private, there may be limited opportunities to sell vested or unrestricted shares, but it will vary by the plan and the company. For instance, a private company may allow employees to sell their vested option rights on secondary or other marketplaces.

In the case of an acquisition, some buyers will accelerate the vesting schedule and pay all options holders the difference between the strike price and the acquisition share price, while other buyers might convert unvested stock to a stock plan in the acquiring company.

Again, this will vary by plan and transaction. You should also consult your financial planner or tax advisor to ensure you understand how stock grants, vesting events, exercising and selling affect your personal tax situation.

We're using cookies to improve your experience. Click Here to find out more. Entertainment Like Follow Follow. What types of stock plans are out there, and how do they work? How do I know when to exercise, hold or sell? What are the tax implications? What are the most common types of employee stock offerings?