You should fully understand the risks of trading options before you trade. For more information, please read the Characteristics and Risks of Standardized Options. If you have any questions about the exercise or expiration process, please contact Customer Support. The holder of a long options position may choose to exercise the options contracts even if they finish out-of-the-money.

In some cases, exercising out-of-the-money options may be economically beneficial due to stock price changes in the extended hours session. If you are short options which appear out-of-the-money, there is no guarantee that you will NOT be assigned those contracts. The holder of a long options position may choose to NOT exercise the options even if they finish in-the-money. In some cases, it may be economically beneficial not to exercise an in-the-money option due to stock price changes in the extended hours session.

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• What Happens to Your Employee Stock Options When You Leave Your Company? – Daniel Zajac, CFP®.
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• What Happens When Employee Stock Options Expire In-The-Money?.

If you are short options which appear in-the-money, there is no guarantee that you will be assigned those contracts. You should review your positions prior to expiration to determine whether you have adequate equity in your account to carry the underlying position prior to exercising options. If I had a client who wanted to leave because they wanted to retire, for example, we might model out retirement income projections.

The timeline until your unvested shares vest is also important.

If we assume that Grant 3 is scheduled to vest in the near term, it may make sense to work a little longer, allowing the shares to vest and you to capture the value. Alternatively, if the shares do not vest for several years, the value of the unvested options is not an important part of your retirement plan, or both, then pulling the trigger to retire and forfeiting the option shares may be a better choice for you.

If you leave your company voluntarily, either to retire, to take another job, or to take a break from work, you generally have up to 3 months or 90 days from your termination date to exercise your vested options. As always, check your plan document as this period can be shorter or longer. Even if the expiration date of your employee stock options is further out in time than the day exercise window, you must exercise within this new post-termination period. However, if your original expiration date is after you terminate your employment but prior to the end of the day post-termination exercise window, you will need to exercise by that original expiration date to capture the value.

If you have incentive stock options , your post-termination exercise considerations may become even more complicated. For an incentive stock option to retain its status as such, you must exercise the option within 90 days of termination of your company. But if your company gives you one year from termination to exercise your incentive stock options , you will need to exercise them within the day post-termination period even though you have up to one year per the plan document in order to retain their status as incentive stock options.

Both an approaching expiration date and a change of employment status signify a point where you need to make decisions around your options—choosing not to exercise means that you run the risk of losing the ability to capture in the money stock option value.

Generally speaking, the timeline you have to exercise your employee stock options is longer if you become disabled than it is if you terminate for another reason. Often, you will have one year from the date you terminate employment to exercise your employee stock options. If you have incentive stock options and become disabled, the 3-month post-termination exercise period is extended to 12 months. This allows for additional time to strategize the best way to exercise your options and plan for the future.

Put and call options

Like the post-termination period, if you become disabled, the post-termination exercise period for employee stock options, if you die, is longer than if you leave for another reason. Commonly, one year is used.

But as always, you want to check your plan document to determine if your period is shorter or longer. If you have incentive stock options, the rule that requires incentive stock options to be exercised within 3-months of job termination or in this case, death to retain status as an ISO is waived, so long as you were employed as of your date of death or within the three months preceding death.

Many plans will allow you to name a beneficiary of your employee stock options. This person may be able to act on your stock options upon death.

Employee Stock Options

In lieu of a beneficiary, your personal representative in charge of handling your estate affairs will likely be able to assist in the exercise of the shares. When you leave your company, you likely have a short-term period during which you can exercise your remaining stock options. With that said, some advanced planning may be available to you.

The first step is to check the document to know what timeframes you are dealing with. Know how long you have to exercise and how different circumstances for leaving might impact that timeline. Next, plan and strategize for your incentive stock options. You might want to consider exercising within the day period in order to retain the ISO status. 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. 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.

Also, if your time period to exercise is about to expire, you may want to exercise your options to lock in your discounted price.

What You Need to Know About Stock Options

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 The amount of income reported will depend on the bargain element also called the compensation element. When you decide to sell your shares, you will have to pay taxes based on how long you held them.

If you exercise options and then sell the shares within one year of the exercise date, you will report the transaction as a short-term capital gain. This type of capital gain is subject to the regular federal income tax rates. If you sell your shares after one year of exercise, the sale falls under the category of long-term capital gains. The taxes on long-term capital gains are lower than the regular rates, which means you could save money on taxes by holding your shares for at least one year.

ISOs operate a bit differently.