What does it mean for a company to exercise options?
In: Economics
I assume you mean exercising *stock* options. “Exercising options” just means “doing something you’re able to do.”
Stock options are a benefit granted to employees of some businesses, wherein they offer to directly sell stock in the company at a pre-set price, which will generally be lower than the market price. When you “exercise your stock options,” you buy the stock.
Microsoft is selling at $412 a share on the market today, but a Microsoft employee may be given the option to purchase up to 1,000 shares at a fixed price of $400. This essentially amounts to a cash bonus of $12,000 since if the employee fully exercises their stock option, they will save $12,000 versus somebody who buys 1,000 shares on the market.
This is better for Microsoft than simply giving people a $12,000 signing bonus, because it encourages sale of their stock and ties the employee to the company as they have real ownership of it.
Stock options are insurance that allows you to sell or buy stock at a contracted price regardless of what the market price is. So, for example, you bought stock at $100 per share. You buy options that allow you to sell the stock any time for the next 12 months at $80 per share. 3 months later the price drops to $20 per share and you use your option to sell at $80 to limit your losses. The guy that sold you the options is out a lot of money but you bought that insurance at a very small price and now you’re exercising it.
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