How to Exercise a Stock Option

by Owen Pearson

If you work for a large company, stock options can be as important as other types of benefits, such as access to a 401(k) plan and group health insurance. A stock option is the ability to purchase company stock at an agreed-upon price, which may be lower than the price available to other investors. Exercising a stock option involves taking advantage of your employer's offering during the time period specified by your employer. Several strategies are available for exercising stock options.

Review the stock option agreement provided by your employer to determine when you can exercise your options. You may have to exercise your options on a specified date or within a specified timeframe.

Check with your employee benefits administrator to determine the option price of the stock.

Pay cash to obtain company stock during the option period. For example, if the company offers an option to purchase 100 shares for $10, you would give the employer $1,000 and receive stock certificates for 100 shares.

Execute a cashless exercise through a stockbroker. A cashless exercise involves buying shares and selling enough shares at the same time to cover brokerage expenses.

Exchange company stock you own for stock at the option price. If you already own company stock valued higher than the option price, you can use this strategy to obtain additional shares.

Tip

  • Contact an investment adviser before exercising a stock option. Your adviser can help you determine if this strategy is appropriate for your investment objectives.

References

Photo Credits

  • Comstock/Comstock/Getty Images