Let’s begin by stating what stock options aren’t, and that’s shares of stock. In actual fact, stock options are a right to purchase a number of company shares at a set price. This price is typically termed an exercise price, a strike price, or a grant price.
Because the cost of your purchase doesn’t change, you could profit from the difference if the stock value rises. The hope would be to sell your newly acquired shares for a higher price. Of course, you’d never be under any obligation to exercise - they’re called options, after all.
Don’t worry. We offer a stock options calculator on our free resources page that shows how this works in practice. Let’s continue with our exploration of stock options.
The Different Types of Stock Options
Stock options fall into one of two categories:
- Incentive stock options (ISOs)
- Non-qualified stock options (NSOs).
The main difference is when and how they’re taxed, as an ISO may qualify for special treatment. An NSO, on the other hand, usually requires taxes be paid when the option is exercised, as well as when it’s sold.
For an ISO to receive special treatment, you’d need to keep your shares for a minimum period (12 months after exercising and 24 months after your grant date.
You may also only be subject to taxes once you’ve sold your shares. If you don’t sell your shares in the same year you exercise them, however, you may need to pay AMT (Alternative Minimum Tax).
Stock Options Grants
A stock options grant is how a company distributes these options. Taking the form of a document, the grant typically includes details on:
- The type of stock options you’ll be awarded
- The strike price
- The volume of shares you can buy
- The vesting schedule (see below)
If you’re looking to buy and sell stock at some future point, the first step is accepting the stock option grant.
Accepting the grant doesn’t cost you anything, and, as mentioned, there’s no requirement to exercise your options. If you accept it, however, you’re giving yourself the opportunity to exercise them in the future.
Stock Options and Vesting
Vesting is earning over time. Companies use it to encourage employees to remain with them and play a part in their success over a long period. That process begins with onboarding and continues throughout the employee’s lifecycle.
Vesting usually occurs on a schedule that, along with the start date, is stated on the stock option agreement. Many companies have a four-year vesting schedule that often begins with a one-year cliff. A cliff is the duration that needs to pass before you can claim your vested options.
How Stock Options Work
A stock option value calculator is the easiest way to see how this works. But here’s a quick example to give you an idea.
Let’s say an investor is speculating that the value of stock x will rise in six months. It’s currently valued at £10, and the investor buys a call option with a £100 strike price.
At the expiration date, the stock now stands at £70. As the stock is £20 higher than the strike option, the call option is worth £20.
Knowing the Value of Your Stock Options
Understanding stock options can help you make intelligent decisions about when you should sign your option grant and exercise your options. But what about the value of your stock options?
The team at Onfolk has created a stock options calculator you can download to help you determine a stock option's value. This free tool will tell you the value of your stock options after tax.
Download our stock option value calculator today and play around with it to help you further understand how it all works. While you can work the numbers out manually, our stock options calculator can mitigate human error while saving you time in the process.
Let’s begin by stating what stock options aren’t, and that’s shares of stock. In actual fact, stock options are a right to purchase a number of company shares at a set price. This price is typically termed an exercise price, a strike price, or a grant price.
Because the cost of your purchase doesn’t change, you could profit from the difference if the stock value rises. The hope would be to sell your newly acquired shares for a higher price. Of course, you’d never be under any obligation to exercise - they’re called options, after all.
Don’t worry. We offer a stock options calculator on our free resources page that shows how this works in practice. Let’s continue with our exploration of stock options.
The Different Types of Stock Options
Stock options fall into one of two categories:
- Incentive stock options (ISOs)
- Non-qualified stock options (NSOs).
The main difference is when and how they’re taxed, as an ISO may qualify for special treatment. An NSO, on the other hand, usually requires taxes be paid when the option is exercised, as well as when it’s sold.
For an ISO to receive special treatment, you’d need to keep your shares for a minimum period (12 months after exercising and 24 months after your grant date.
You may also only be subject to taxes once you’ve sold your shares. If you don’t sell your shares in the same year you exercise them, however, you may need to pay AMT (Alternative Minimum Tax).
Stock Options Grants
A stock options grant is how a company distributes these options. Taking the form of a document, the grant typically includes details on:
- The type of stock options you’ll be awarded
- The strike price
- The volume of shares you can buy
- The vesting schedule (see below)
If you’re looking to buy and sell stock at some future point, the first step is accepting the stock option grant.
Accepting the grant doesn’t cost you anything, and, as mentioned, there’s no requirement to exercise your options. If you accept it, however, you’re giving yourself the opportunity to exercise them in the future.
Stock Options and Vesting
Vesting is earning over time. Companies use it to encourage employees to remain with them and play a part in their success over a long period. That process begins with onboarding and continues throughout the employee’s lifecycle.
Vesting usually occurs on a schedule that, along with the start date, is stated on the stock option agreement. Many companies have a four-year vesting schedule that often begins with a one-year cliff. A cliff is the duration that needs to pass before you can claim your vested options.
How Stock Options Work
A stock option value calculator is the easiest way to see how this works. But here’s a quick example to give you an idea.
Let’s say an investor is speculating that the value of stock x will rise in six months. It’s currently valued at £10, and the investor buys a call option with a £100 strike price.
At the expiration date, the stock now stands at £70. As the stock is £20 higher than the strike option, the call option is worth £20.
Knowing the Value of Your Stock Options
Understanding stock options can help you make intelligent decisions about when you should sign your option grant and exercise your options. But what about the value of your stock options?
The team at Onfolk has created a stock options calculator you can download to help you determine a stock option's value. This free tool will tell you the value of your stock options after tax.
Download our stock option value calculator today and play around with it to help you further understand how it all works. While you can work the numbers out manually, our stock options calculator can mitigate human error while saving you time in the process.
