Can you help me to understand stock options when offered by a company?
It’s viewed as a “perk”. What are they?
What do you do when they’re offered to you?
What’s the risk?
What’s your suggestions for exercising them?
Hey @Mloehwing!
Well, stock options are good! When you get a stock option, it’s an “option” to buy a share of the company stock at some point in the future for some set price called the “strike price”. They’re generally offered as a way to compensate employees and encourage them to stay with the company and try to make the stock price grow!
For example, let’s say your company is publicly traded and the stock price (or exercise price) is $20/share. And let’s say you get 100 stock options with a $15/share stock price. There is usually some requirement to hold them for a while or only trade during certain windows. But let’s say a year later the stock price as climbed to $25/share.
In that scenario you use your option to buy that stock. So you spend $15 (your strike price) x 100 shares = $1,500 and now you own 100 shares of company stock. That’s good because it’s worth $2,500 now. So you basically got a free $1,000!
You might be thinking, “but I have to SPEND money to get this stock”. Well yeah, kind of. But if you DON’T want to, the brokerage that holds your stock options is smart enough to figure out that your options have value, and they can sell some of those shares of stock instantly upon exercising them, so that you don’t have to pay any money out of pocket, but you end up with less stock. In the example above, you would exercise all 100 shares, and immediately sell 60 shares (worth $1,500) and you get to keep the remaining 40 shares worth $1,000.
Now, that’s not how it always works. Let’s say your strike price is $15 but a year later the stock price has dropped from $20 to $10. Now your options are “underwater”. Meaning, you have the option to buy them for $15 per share, but anyone in the world can buy them for $10/share so your options are worthless. But you can always just keep holding them and not exercise. If the stock price rebounds to $200/share you’ll be glad you did! 
If your company ISN’T publicly traded, well then it’s a little harder to get money out of them. It’s more like a lotto ticket waiting to get cashed out if your company does have an IPO. There might be other ways to redeem them internally if you ask HR.
There’s no real RISK. The way you would lose money is if you spend money to exercise them, then hold the stock and the stock price plummets to below your strike price. Then you’ve lost money, but you can mitigate that by “selling to exercise” as I described above, or just selling down to a small portion of your portfolio.
So what to do? Just hold them, keep an eye on them. Be aware of the stock price and likely exercise them one day when they’ll make you a lot of money! Exactly when and how you pay for it depends a lot on your specific situation, taxes, etc. If it’s a small number, just do what makes logical sense. If it’s a big number, it’s probably worth going over with a professional.
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hi! I just got an opportunity from HR to participate in employee stock sharing program. they’re offering to match 0.5 of a share, and it’ll be a 20% discount. Something about a 3 year lock in as well. Is it worth it to participate in this, if i’m not maxing out my 401k match nor hsa? another tidbit is that they said this isn’t guaranteed to come around again next year, so this year may be the only year to participate depending on how well this goes. Would be great to get any feedback, thanks!
Hi Stella,
I don’t have too much insight on employee stock options, but either way I would make sure to prioritize your 401k match, because that is a guaranteed 100% return on your money that you are turning down!!