Exercise your stock options to buy shares of your company stock and then hold the stock. Depending on the type of the option, you may need to deposit cash or borrow on margin using other securities in your Fidelity Account as collateral to pay the option cost, brokerage commissions and any fees and taxes if you are approved for margin. Exercise your stock options to buy shares of your company stock, then sell just enough of the company shares at the same time to cover the stock option cost, taxes, and brokerage commissions and fees.
How Are Employee Stock Options Taxed? | The Motley Fool
The proceeds you receive from an exercise-and-sell-to-cover transaction will be shares of stock. You may receive a residual amount in cash. With this transaction, which is only available from Fidelity if your stock option plan is managed by Fidelity, you may exercise your stock option to buy your company stock and sell the acquired shares at the same time without using your own cash. The proceeds you receive from an exercise-and-sell transaction are equal to the fair market value of the stock minus the grant price and required tax withholding and brokerage commission and any fees your gain.
Tip: Know the expiration date for your stock options. Once they expire, they have no value. When your stock options vest on January 1, you decide to exercise your shares. You sell your shares at the current market value. No matter how well or poorly the company does, this price will not change. You can also hold it and hope that the stock price will go up more. Note that you will also have to pay any commissions, fees and taxes that come with exercising and selling your options.
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There are also some ways to exercise without having to put up the cash to buy all of your options. For example, you can make an exercise-and-sell transaction. To do this, you will purchase your options and immediately sell them. Rather than having to use your own money to exercise, the brokerage handling the sale will effectively front you the money, using the money made from the sale in order to cover what it costs you to buy the shares.
What Are Employee Stock Options and How Do They Work?
Another way to exercise is through the exercise-and-sell-to-cover transaction. With this strategy, you sell just enough shares to cover your purchase of the shares, and hold the rest. You can find this in your contract. When and how you should exercise your stock options will depend on a number of factors.
You would be better off buying on the market. But if the price is on the rise, you may want to wait on exercising your options. Once you exercise them, your money is sunk in those shares.
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So why not wait until the market price is where you would sell? That said, if all indicators point to a climbing stock price and you can afford to hold your shares for at least a year, you may want to exercise your options now.
Avoid Premature Exercise Of Employee Stock Options
Also, if your time period to exercise is about to expire, you may want to exercise your options to lock in your discounted price. You will usually need to pay taxes when you exercise or sell stock options. What you pay will depend on what kind of options you have and how long you wait between exercising and selling. With NQSOs, the federal government taxes them as regular income. The company granting you the stock will report your income on your W Companies grant stock options to motivate employees.
For example, suppose a company you work for offers a stock-option package that allows you to buy 1, shares of the stock at the prevailing market price on the day you received the options. You can hold on to the stock options until some future date and then make a tidy profit. When employees exercise stock options, they get to buy shares of the company's stock at the locked-in price.
If they immediately sell the shares after buying them, they get to pocket the difference between the old price and the current price. In other words, exercising stock options means instant profit. So any employee holding stock options has an incentive to work hard to get the company's stock price to increase. If, on the other hand, a stock's price falls after stock options are issued, the employee doesn't lose anything tangible.
Owning stock options doesn't mean you have to exercise them. It only means you have the right to exercise them if you wish. Besides offering an incentive to employees, stock options also offer another advantage. Granting stock options allows a company to offer financial rewards to employees today but postpone paying for it until later.