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Stock Option Glossary Definition- As defined by a Duke University resource.

Emily Cervino brought this Stock Option Glossary definition to our attention. She pointed out the sentence:

"Stock options are a present to you from your company, usually with some conditions attached."

Interesting, especially from a Duke University resource.



Stock Options

These used to be something given only to corporate executives but in recent years the use of stock options has spread into the lower ranks of public company employees. Stock options are a present to you from your company, usually with some conditions attached. A stock option gives you the opportunity to buy shares from the company, typically at some time in the future. When granting you the stock options the company will state the number of shares you can buy, the price that you can buy the shares for (known as the strike price), and when you can buy them (known as the exercise date or vesting date). The strike price is generally the same as the share price on the date the stock options were granted (sometimes called "at the money"). For example, you might be given the option to buy 1,000 shares at an option price of $10 a share, exercisable in two years' time. When that time comes and the stock options mature (see Maturity Date [Stock Options]), you can buy the 1,000 shares from the company at a cost of $10,000 as promised. If during those two years the share price of the company increases to $25 a share, after you have bought the shares for $10,000 you can immediately sell them for $25,000 and make a pretax profit of $15,000. This is usually referred to as the options being "in the money." But what happens if the stock price instead of rising to $25 drops to $4 a share after two years? Then you are out of luck. The options are - at that time anyway - worthless. If you were to buy them for $10,000 you could only sell them for $4,000 (which of course you would not do). This is also known as your options being "underwater." It is an unfortunate position to be in, but it can happen if the stock market either drops over a period of time or drops at the wrong time, or if the price of that particular stock is down for some reason. Stock options can be a good benefit, but they are not guaranteed to make the owner money. Unless you are a very senior executive, the type of stock options you receive will probably be nonqualified options. Senior executives usually receive stock options known as incentive stock options. The tax treatment of the two kinds of stock options is different. For holders of nonqualified stock options in particular, exercising them must be done very carefully as there may be significant tax implications. A stock option granted by an employer is not the same as an investor buying an option to purchase shares.


Edited Tue, Apr 24, 2012 1:20 PM

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