What is the best thing to do with stock options?
Hold Your Stock Options
Yet another option is to sell all the shares you receive immediately after you exercise your options at the going market price. This way, you won't have any ongoing exposure to stock price volatility, and you won't have to come up with the cash needed to exercise the options and pay transaction costs.
If you have an immediate need that can't be put off, selling your shares and using the gains could be a better alternative to taking out a loan or accruing debt. In some cases, you might want to act now if you expect costs to rise.
If you can already comfortably afford all of your expenses, you may benefit from holding onto them if you believe your company's stock price will increase. But if you need an extra boost of cash and your options are in the money, exercising them could be the right decision for you and your investing or saving goals.
Options do have value. Just look at the financial exchanges, where options on stock are bought and sold for large sums of money every second. Yes, the value of option grants is illiquid and, yes, the eventual payoff is contingent on the future performance of the company. But they have value nonetheless.
Often it is more profitable to sell the option than to exercise it if it still has time value. If an option is in the money and close to expiring, it may be a good idea to exercise it. Options that are out-of-the-money don't have any intrinsic value, they only have time value.
It only makes sense to exercise your options if they have value. If they do, they're known as “in-the-money.” This happens when the strike price (or exercise price) of your stock options is lower than the market price of your company shares trading on the exchange.
Because if you don't exercise your options before the expiration date, they will be worth absolutely nothing. Nada. Zip. Options are very much a use-it-or-lose-it proposition, and it could be very painful to “lose it” if your strike price is below the current fair market value of the common stock.
Statutory stock options
You have taxable income or deductible loss when you sell the stock you bought by exercising the option. You generally treat this amount as a capital gain or loss. However, if you don't meet special holding period requirements, you'll have to treat income from the sale as ordinary income.
Stock options are typically taxed at two points in time: first when they are exercised (purchased) and again when they're sold. You can unlock certain tax advantages by learning the differences between ISOs and NSOs.
What is a disadvantage of stock options?
Stock options can dilute the stock price: Stock options might have a dilutary effect, which may reduce the value of the stock in the long run.
Trading options for a living is possible if you're willing to put in the effort. Traders can make anywhere from $1,000 per month to $200,000+ per year.
Buyers of an option position should be aware of time decay effects and should close the positions as a stop-loss measure if entering the last month of expiry with no clarity on a big change in valuations. Time decay can erode a lot of money, even if the underlying price moves substantially.
On average seed startups will issue from 2% to 8% of stock options (from the fully diluted shares). If a CTO is needed, he may get 1% to 4%. Other employees will typically split the rest, adjusted for experience, seniority, needs of the company, and skillset. You typically can ask for 0.25% to 2.0%.
If you're offered, say 1,000 shares by your employer, a startup that's still privately owned, that means you have the option to buy that many shares at today's price, called the "strike price" or "exercise price" ... but you can't buy them today.
Size of the option pool
A good starting point when thinking about option allocations, is to consider the total sizeof the option pool. A typical employee stock option pool at pre-seed round is about 12-15%, diluted to 10% at series A.
A Bull Call Spread is made by purchasing one call option and concurrently selling another call option with a lower cost and a higher strike price, both of which have the same expiration date. Furthermore, this is considered the best option selling strategy.
If you intend to hold your shares as part of your financial plan, exercising your options when the price is down can be beneficial for both minimizing taxation and starting the holding period for a qualifying disposition when you do decide to sell.
Time decay: Options are a wasting asset since the value of the option erodes as time passes and it approaches its expiration date. Option sellers benefit from time decay. Option buyers do not. As time passes, the option seller can profit from the erosion of the option's value.
Stock options serve a dual purpose: A form of incentive for the employee, potentially leading to financial gain contingent on the company's success. The promotion of employee retention, as stock options often come with vesting schedules that require a certain length of employment before they can be exercised.
Why would I exercise an option?
However, there are some reasons why exercising is the right thing to do, so there may be occasions when you do want to. The most common reason for exercising is when you own call options based on an underlying security and you decide you actually want to own that underlying security.
The seller of options makes profit more frequently, but he/she earns small amounts every time and. The buyer of options earns larger profits from each winning trade, but he wins less frequently.
With an options contract, you are not obligated to take any action. If the contract is not fulfilled by the due date, it automatically terminates. Any option premium you paid will be returned to the vendor.
If a good leaver, the recipient will keep the number of options already vested, and any remaining options will be cancelled. They'll be able to exercise their options based on the existing criteria.
Understanding Exercise Windows
An employee receives some amount of stock options, which vest over a certain schedule. Options have a 10-year term from the grant date. As long as you stay with your company, your options do not expire for 10 years.
