What happens when i exercise my stock options

The stock market rise has put stock options front and center. Just like in previous booms, companies are trying to attract talented workers by granting them an option to buy company stock at a low price, which workers can sell for a much higher price if the company goes public or gets acquired by a bigger company.

Unfortunately, many employees still lack a strategy for exercising their stock options, which could prove to be disastrous when tax time rolls around. Others wait and wait, until their options are expiring and they are forced to sell before they lose all their value. Part of this mentality was born during the dot-com bubble era of the late s, when stock options were seen as retirement golden tickets because of their meteoric rise in value.

Sadly, many of these hoped-for riches evaporated when the tech bubble popped, and employees who had been granted potentially lucrative options to cash in company stock were left with worthless paper because they had held on for too long.

Having a process-driven strategy is vital when evaluating your stock options, so that you can make the smartest possible financial decisions. Here are five important questions to ask before exercising and selling your stock options. Just because options are granted does not mean you have received an immediate bonus. A typical vesting schedule is over four years, with one-quarter of shares vesting after each year.

Once the shares are vested, you can exercise and sell to take that long-awaited trip to Hawaii.

If your options are expiring soon, you will not have as much of a choice, but you still may be able to spread it over several years to stay in a lower tax bracket. Consider how long you plan to hold the stock after exercising. If you can hold longer than a year, the stock may qualify for capital gain taxes, which is likely lower than ordinary tax rates. However, this decision involves risk.

If the stock price falls after you exercise, even though your stock options may then be worthless, you could still be subject to the Alternative Minimum Tax.

This is where knowing if you hold Incentive Stock Options ISO or Nonqualified Stock Options NQSO is essential. Any gains on ISOs that occurs after you exercise, if held for a year, are taxed at capital gain rates. Be aware, there may be a difference in the grant price and the fair market value when exercising.

This is known as a bargain element and is used in the AMT calculation. When stock prices start to increase, options can quickly become the largest holding in a portfolio. Because of the grant price, options have a great deal of leverage, meaning they can be worthless for years before rising suddenly and dramatically if company shares become a hot commodity.

Options that were worth nothing one day can be worth thousands of dollars the next. At this point, it becomes equally important to consider the valuation metrics and future growth potential of the stock.

Having a double-digit allocation to your company stock amplifies the potential outcome — good or bad. Good questions to ask include: How quickly have sales been growing? How profitable is the company? Is the company an acquisition target? What type of competition does the company have?

Often when stock options are owned, employees will have restricted stock units as well as access to an employee stock purchase plan ESPP.

If the vesting schedules are defined, you will have a good idea of the share amounts that may be coming your way. You may also seek help from a fee-only financial planner to assist in your decision-making. NerdWallet strives to keep its information accurate and up to date. All financial products, shopping products and services are presented without warranty. Pre-qualified offers are not binding.

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How to know when it’s time to exercise your stock options - MarketWatch

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Strategies For When To Exercise Your Stock Options

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