Options Trading Tutorial

Do you have to exercise stock options?

I currently work for a company that gives restricted stock awards/grants. I have been offered a position with a company that is offering me both restricted stock awards/grants and stock options. I have never dealt with stock options before, but I think that I do know how they work. If I agree to the stock option plan, I will have the option to purchase 1,000 shares that will vest over 3 years and expire within 10 years. I realize that if the price of the stock is $10 when the plan goes into effect and I exercise the vested options at $30, I will pay the $10 a share and "earn" $20 profit per share. My question is, if the stock price never goes above the price of the shares when the plan goes into effect, do I have to exercise my options and end up losing money? Might be a stupid question, but I don't know the answer! Thanks!

Public Comments

1. It sounds like you did some good research and thinking of benefits and possible pitfalls of options. You can never be forced to exercise an option. The situation you described is called "underwater" and can be quite common. When the time comes, you should also look at the tax effects before you exerciese. I know multiple people that exercised and then had the price fall. They still owed tax on the original gain ($20 in your example), but the stock was worth less than the tax bill. It was not pretty.
2. No, you don't have to exercise these options if the stock price is not higher, but definitely take advantage of this program because you will most likely make money of it in the long term especially if it is a good company. As the previous person mentioned, make sure you see a CPA when doing your taxes when you exercise the option because I do believe that you will have to pay tax at your marginal rate rather than the LT Capital Gains rate which is obviously more favorable, but oh well you will be making money anyway.
3. Skinny No you do not. It is a way to entice and reward the companies team. While nothing is assured. the benefit is there to get a commitment; and, for all to succeed, as the company succeeds. Everyone benefits from the companies success. It is a great benefit, and a tremendous financial opportunity. Soccerref