what is a stock option and how do I cash them in?
Posted by admin in Finance Wednesday, 27 April 2011 00:44 3 Comments
I have 400 stock options that were given to me as a bonus, but I don’t know how stock options work. Do I have to pay for these options at the price that was posted when I received them if I want to exercise them?
Options are two types put or call. Call will allow you to buy the stock at the set price for the option, call will allow you to sell it. You can exercise an option by buying stocks at the call price through you broker, or you can sell the option without exercising it making almost most of the profit you would with exercising the option but you don’t have to come up with the cash. For more on options see http://en.wikipedia.org/wiki/Call_option
A stock option is the right, but not the obligation, to buy a stock at a predetermined price (the “strike price”).
As an example, let’s say that you have options on 400 shares at a strike price of $10. You are now vested and the company’s stock has risen to $20. You can:
a). Exercise your options and hold the stock. That means that you would be buying 400 shares at $10 per share. Of course, you’ll own stock that’s worth $20 per share, so you’ve made an instant profit. You’ll have to pay out $4,000 (400 shares x $10) plus the broker’s commission.
b). Exercise your options and sell the stock immediately for cash. Your broker will buy the 400 shares at $10 each and immediately sell them at the market price of $20 each. You’ll receive $4,000 ($8,000 sale price less the $4,000 purchase price) less the broker’s commission.
c). You can do nothing and hope that the stock price goes up further.
A and B are taxable events, so make sure that you plan for that.
If the company’s current stock price is less than or equal to your options’ strike price, then your options are worthless. No one will pay $10 a share to buy a stock that’s $5 on the open market. Just hang on and hope that the stock price goes up.
Note: The previous answer refers to publicly traded options, not employee options. There are no puts in employee options. Some of that information still applies to you, but some of it doesn’t.
First find out what the price is on those options. If the stock price is more than the option price, you get the difference in price. If its less, the options are pretty much worthless except for the time value left on them. Usually you have a certain amount of time to cash them in before they expire. Oh i should tell you…if those are december 2007 options, you better get down to your stockbroker right away, because option expiration for december is tommorrow!