Intro to options
Strike aka Exercise Price
The price at which you have the option– but not the obligation– to buy the stock at. If this price is BELOW the current fair market price at which you could sell the stock for, your options are ‘in the money’. If the current value is BELOW your strike price, you are ‘out of the money’, and the only value in your stock options is the ‘time value’, the chance that the future price will be higher than your exercise price. If the market value never exceeds your strike price, your options will ‘expire’ worthlessly at the expiration date, which is typically around the time your terminate with your employer OR 10 years from when the options were granted to you (NOT from the later date when the vested.) Companies that have not IPO’d or otherwise sold themselves will often adjust the expiration dates so that long-time employees don’t get screwed out of their options at the 10 year mark.
Calculating the value of stock options
The value (market price) of options have two components: the money value, and the time value. Added together, these = what someone would pay for your options.
Money value
The difference between the current stock price and your strike (exercise) price.
Time value
An option has time value because you can’t lose money when the underlying asset dips below the strike price AND the fact that the underlying asset can still increase in value before your option expires. To compute the time value, use this calculator: https://www.cboe.com/education/tools/options-calculator/
Employee Stock Options: ISOs and NSOs
Incentive Stock Options (ISOs) provide favorable tax treatment if you follow some of the rules. If you hold the resultant shares for 2 years after the option grant date AND 1 year after you exercise the options, then you pay long-term capital gains taxes on the different between the market value at sale (sale price) and the original strike price. If you fail to do this, you must pay regular income taxes on the difference between the purchase price of the stock (the fair market value at exercise) and the exercise price.
NSOs can often be held longer past an employee’s termination date with a company, but have less favorable tax treatment. The tax is essentially the same as a “disqualifying disposition” for ISOs.
Employee stock option taxes
Summary: https://carta.com/learn/equity/stock-options/taxes/ with excerpts below:
Comparison of tax treatment of ISOs by holding periods: https://dqydj.com/iso-calculator/
