Can anyone explain stock options to me?

[RadioNate]

DH was bonused stock options for the first time this year and basically I are totally confused about how it all works.

Do we have to put out any money for the options, now? How about when they are vested?

For arguements sake say the grant amount is 100 shares at $10 and they vest in 5 years.

So in 5 years we can buy them for $1000 and then sell them for their going rate. Can the buying and selling be done in 1 transaction so we just get the difference between the going rate and the grant price?

Can you tell I'm totally confused?

 

[Feralpeg]

It depends on your plan. My company did stock options as well. You should not have to put in any money now.

When I exercised mine, I did them as a cashless transaction. In other words, I contacted a broker who sold the shares for the going price. That price was higher than the grant price, so part of the proceeds went to pay for the option. The remainder came to me.

When you do exercise the option, it is best if your company can withhold taxes for you. That will make it much less painful when it is time for you to do your taxes.

 

[Toby'sFriend]

I don't blame you, I have an Accounting Degree and an MBA and stock options give me a headache.

There used to be a pretty good "lesson" on stock options in the personal finance section at http://money.com. I don't know if it is still there or not, but it was pretty well written.


One thing however, usually you can exercise the options before the Vesting date, but you can't withdraw the stock or the proceeds until after the Vesting Date. Read your contract.

 

[bicker]

It gets even more confusing if your company is foreign-owned, and then yet-even-more confusing if the company is in some EU countries. My company is German-owned, and so we have to mess around with the darned "strike price" crap.

 

[Galahad]

If you're lucky it's somewhat automated. Our company's options are administered through Merrill Lynch. We can log onto their website and do a "what if" transaction to see what would happened if we exercised them under different scenarios (cashless, etc). You can quickly see what you're net would be that way. If you work for a large company, it's possible they'd do something similar.

 

[PlutoPony]

The company is essentially telling you that in 5 years (or whatever the vesting time is) you can buy x number of shares of stock at y price (say $10 in your example). For this to be a good deal, you need the company's stock price at the vesting time to be more than that $10 price - that's how you make money. Not to be too simplistic but if the stock's trading at $25 then, you have an automatic $15 profit/share. It's also possible that the company's stock price will be less than that $10 in which case the options are essentially worthless. Couple of other things to check - do you have to be working for the company when the options vest in order to take advantage of them (i.e. the "golden handcuff" approach), and how long after the vesting time do you have to use the options. Also be aware that any profit is taxable so plan for that if at all possible.
Hope it works out for you!

 

[golfgal]

If your stock was granted at $10 a share and in 5 years you go to sell them and they are at $20 a share you earn $10 a share profit. They will take out the price of the original stock and probably some trading fees and the rest will be considered income. Dh's stock options, when cashed in, are reported on his W2 as income so we don't have to do any other special tax forms.

One thing to double check is are they VESTED in 5 years or do they EXPIRE in 5 years, meaning if you don't cash them in in 5 years you lose them? DH has about 10 years to cash his options in, normally.