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Day 10 - Employee Stocks Options
By JLP | February 16, 2006
I’m finally getting back to the 24 Days to Better Finances series. I’m sorry it took so long but a lot of stuff happened recently to keep me from blogging. Anyway, I hope things are back to normal. Bloggers, send me your links!
I must confess that I’m not an authority on employee stock options. However, I do know some of the basics.
A stock option is just that: an option. When a company issues stock options for its employees, the following happens: the employee recieves the right to purchase company stock within a certain amount of time at a certain price (called the “strike price”).
For example, an employee recieves stock options for 1,000 shares of their company’s stock at a strike price of $50 per share. These options expire in two years. Right now the stock is trading at $30 per share. In this example, the employee won’t make any money on these options until the stock is trading ABOVE $50 per share (actually, if trading costs are involved, the stock may have to trade even higher before they are “in the money”).
Let’s say that something really good happens with the company and stock price moves to $65 per share. The employee could then exercise their option and buy 1,000 shares of stock at $50 per share and turn around and sell it for $65 per share, making a profit of $15 per share or $15,000. Of course, the employee doesn’t have to sell the stock. They could hold onto it if they chose. However, they would have to have the $50,000 available to do so. Keep in mind that this is a taxable transaction and could even make you subject to the AMT (Alternative Minimum Tax).
For more information, see IRSPublication 525’s section on Employee Stock Options. It is a confusing topic and one that you should probably talk over with a qualified CPA or tax attorney BEFORE you make a move.
Now, here’s what some of the other bloggers are saying about employee stock options (as you can tell, not many bloggers have tackled this topic):
Money and Investing:
PoliticalCalculations:
Should You Keep or Sell Those Stock Options?
Topics: Uncategorized |
February 16th, 2006 at 2:11 pm
just a question…..what happens once the options expire? are you no longer able to purchase/option them? do they disappear?
February 16th, 2006 at 8:50 pm
I talked about employee stock in a nice little series not too long ago. Note that Employee Stock Purchase Plans (ESPPs) are not the same thing as options, and neither is the same thing as an Employee Stock Ownership Plan (ESOP).
February 17th, 2006 at 8:26 pm
Employer-granted stock options come in two forms, incentive stock options (ISOs) and non-qualified stock options (NQSOs). The tax treatment depends upon the form.
Employer-granted options typically don’t expire, they are exercisable up until the employee separates from service. Daniel, these shouldn’t be confused with exchange-traded options which, if not exercised and/or are not in the money, expire worthless.