Stock options explained: Employee Stock Options

Now a days more and more job positions offer Employee Stock Options or ESO, making it necessary for more and more people to have stock options explained to them. Employee stock options were available previously only for top tier executives of the company. But recently they are being offered to entry level participants to boost their interest in the work. It offers as a bonus for them if and only if the company flourishes and its stock prices go higher. So, they work harder to get the company perform better and get their rewards from the increased stock price.

So, before getting employee stock options explained, you need to know what stock options are. Stock options are simply some contract giving you the right to buy or sell stocks at a fixed price in a specified time. The price fixed in the contract is called strike price and it is the price in which the stocks are bought or sold regardless of their real market price. Stock options give you right but not obligation and the rights are valid before a specific expiry date. Options are of two types. Call option being the right to sell the stocks and put options being the right to buy the stocks.

So, for employee stock options, they are like simple call options with some added details. They are usually offered to the employees as a job benefit and not usually sold to them. These options also have two types. One is Statutory and another being Non-Statutory options. To get employee stock options explained a little more, we need to know what each of them offer.

Statutory stock options are issued under U.S. Securities and Exchange Commission regulations. It has some added regulations. The stock options can be only issued at a strike price above the current market price of the stocks. It can be applied to employees after one or more years of service and has a holding period of one year in which the option cannot be exercised. The option can be exercised after that one year and before its expiration date. The benefit of statutory stock option is that, all profitsfrom these options are taxed at the capital gains rate, rather than as regular income.

Non-statutory options are like regular options and do not have those regulations. They can be exercised at any time before the expiry date and can be offered to any employer at any given strike price. The profits from them are taxed as regular income. Sometimes these options holders can exercise the options directly through their broker and have the profit from directly selling the stocks to the market and pocketing the difference between the strike price and the market price.

Sometimes ESOs have a reload option. This allows the option holder to exercise the option if they see an opportunity to a good gain with the expiration date far away, and then get another option at the strike price equal to current market price. This helps to use the current opportunity while maintaining the window for future gain open.

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