What does it mean for a company to exercise options?

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What does it mean for a company to exercise options?

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2 Answers

Anonymous 0 Comments

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.

Anonymous 0 Comments

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.