Your Options with Stock Options

You’re a valued employee. Your employer wants to reward you with an opportunity to participate in the growth of the company while incentivizing you to stick around. One way a company does this is by providing employees with stock option grants.

Looking around your company, you will see coworkers in various stages of their lives and careers. Even though your stock options may be similar to one another, the strategy you employ to exercise them needs to be custom tailored to your unique situation by considering the following:

• What risks are you willing to assume? Once your ESO’s vest (vesting date), you can then exercise the option to purchase the stock at the specified price (strike price). You can also wait to exercise the option, but you must do something before the expiration date. Between these two dates you’re assuming various risks. What if the price of the stock drops below the strike price? The options could expire worthless. There is also concentration risk as you might have too much of your financial assets tied to the fortunes of one company. This is easy to overlook as some executives have company stock in their 401(k) plans and brokerage accounts, and may even have non-qualified deferred compensation plans that rely on the financial strength of their company. 
• Do you plan to keep or sell the stock after your exercise the option? Some employees worry that they don’t have the cash to exercise the options. Not to worry, there are “cashless exercise” options. If you sell the stock upon exercise, what do you plan to do with the proceeds? If you keep the stock upon exercise, do you have too much tied to the fortuned of one company (i.e. concentration risk)?
• When and how much will you pay in taxes on these options? The answer to this question depends on whether you have Incentive Stock Options (ISO’s) or Non-Qualified Stock Options (NSO’s). Don’t forget to consider how the additional income or capital gains from exercising your options will impact your total tax picture, especially if you are exercising these options during the early years of your retirement.