How To Exercise Stock Options ; Know The Value In Your Stock

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Stock options give investors the right to buy or sell a specific number of shares of company stock at a pre-set price, for a fixed time period. The time period is known as a vesting period, and usually spans 3 to 5 years. During this time frame, certain percentages vest which means that you've earned the shares. However, you will still need to exercise the options, in essence purchasing them. It is important to note that there is no obligation to buy or sell for the investor. It is merely an option for the investor, one with potential big advantages. How do stock options work though? Let's take a deep dive in and review what you can use stock options for and how to potentially cash in early.

How Do Stock Options Work?

Stock options are a great way to retain employees or bring in prospective employees. Employees who have been given stock options have higher incentive to stay with a company. This is because the options aren't vested until a certain timeframe. Options won't be granted to the employee until the end of the scheduled vesting period.

For potential employees, stock options give them a chance to own stock in the company at a reduced price. Having an option to own company stock at a lower price than what you can buy on the open market is a great incentive to a new hire.

Understanding Stock Terminology

In order to fully understand what stock options are, we need to understand some of the basic terms used. With stock options, you may have seen the following:

Bid Price

For the buyer of the stock options, the price they are willing to pay is called the bid price.

Ask Price

For the seller of the stock options, the price they are willing to sell is called the ask price.

Strike Price

The strike price is the price that is set when you are allowed to exercise your options.

Call Option

A call option provides the stock option owner the right to buy the stock during a set timeframe at a predetermined price.

Put Option

A put option provides the buyer of the stock option the ability to sell the shares during a set timeframe at a fixed price.