Options Trading Tutorial

How do company stock options work?

I might be working for a place that has nice benefits and also gives you "stock options" I'm not sure what this means though. How does it work? Can someone please explaing this? Thanks!

Public Comments

1. The simple definition of Stock Options on "HowStuffWorks.com" is: Stock options from your employer give you the right to buy a specific number of shares of your company's stock during a time and at a price that your employer specifies. Visit the link for a very good, detailed explanations. Stock options are good for both the employee and the company.
2. A stock option gives you the opportunity to buy company stock thru the company at a price determined in advance. Say the option says you can buy 100 shares at $10.00 per share any time after July 1, 2008. The Option is basically worthless until 7/1/08-can't be used yet.You want to hope the stock price increases over 10.00 by then. Say it goes up to $15.00 on 7/1/08. You exercise your option (you have to have the money to buy the stocks (100sh x $10 = $1000), then you sell those shares on the open market for $1500. You can also sell the options themselves. The option is worth $500 on 7/1/08 ($5 increase for 100 sh). You could sell the option for say $400. Thhe buyer could turn around and exercise it right away, sell the shares and make $100 or hold onto it and hope for further increase in value. There may be limitations to selling - check with your company, but this is the basic gist of it. If the stock price goes down below $10.00, the option is worthless
3. OK. You go to work as the new head idea man, moving the company forward to new profitability!! (Note, the company HAS to be publically traded, which means its shares trade on a stock exchange) This means more money for shareholders, and they are happy, so the stock price goes up due to your genius ideas :) OK, so how do options work. Lets say you start with the company, and the share price of the stock which trades on a stock exchange is trading at $10 per share. You set and arrangement with your company that you have an OPTION to buy 1 million company shares for $12 each, and this option lasts for the lenght of your employment with the company. OK so when you are starting, your options are worthless because share prices are $10 per share and you have an OPTION (But not the obligation to BUY at $12) So lets say over the next three years, you, as a real mover and shaker, turn the company around, and increase profits by a considerable margin. Now, the shareholders have driven the price of the stock UP to $20 Per share. OK, so remember your sweet arrangement when they hired you. You got Options to BUY 1 million shares of your company's stock at $12 per share. Those same shares TRADE on the open market at $20 share!! That means that your 1 million shares can now be sold for an 8 million dollar profit. Lets say you thought the company share prices were going to rise a lot higher than just $20 per share. Through your hard work you help the company become SUPER profitable.. Now the stock prices are at $60 per share on the stock exchange. You sill have your OPTION to buy 1 million shares at $12 right..now you have 48 million bucks in your pocket. That's basically the idea of how options work. That's not unreasonable either..You always read about these comany CEO's that make 50-100 million on their stock options right?? Uh..some other answers are suggesting that you have to have the money in your pocket to BUY the shares!! That shouldn't be the case. The company will ISSUE you shares that you can sell, or they will loan you the money. One way or another, you won't have to come up with $12 million of your OWN money!! You should feel free to ask them about this..Say oh yeah, in this hypothetical example, how would I go about actually GETTING the million shares to sell??? I don't have 12 million bucks lying around. DR Deth is actually talking more about EXCHANGE TRADED OPTIONS rather than company-issued options. Exchange traded options ususally have the stipulation that the option to buy at a certain price is only good until a certain point in time, Something you DON"T want in your employment contract, unless you think you can very quickly turn the company around, and get share prices to rise quickly as well.
4. www.mystockoptions.com is a nice site that explains all of this. Short version, the company grants you the option to pruchase shares in the future at a price that is guaranteed today. If the stock goes up, you can use the earnings to purchase the shares and make the incremental profit (example if you receive shares at $10, stock goes to $20, you purchase at $10 and make $10/share.)