Stock options adalah
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Definition of stock options — Holloway
List of Partners vendors. A stock option gives an investor the right, but not the obligation, to buy or sell a stock at an agreed upon price and date. There are two types of options: puts, which is a bet that a stock will fall, or calls , which is a bet that a stock will rise. There are two different styles of options: American and European.
American options can be exercised at any time between the purchase and expiration date. European options, which are less common, can only be exercised on the expiration date. Options do not only allow a trader to bet on a stock rising or falling but also enable the trader to choose a specific date when they expect the stock to rise or fall by.
Employee Stock Option (ESO)
This is known as the expiration date. The expiration date is important because it helps traders to price the value of the put and the call, which is known as the time value , and is used in various option pricing models such as the Black Scholes Model. The strike price determines whether an option should be exercised.
It is the price that a trader expects the stock to be above or below by the expiration date. If a trader is betting that International Business Machine Corp. IBM will rise in the future, they might buy a call for a specific month and a particular strike price. Contracts represent the number of options a trader may be looking to buy.
One contract is equal to shares of the underlying stock. Using the previous example, a trader decides to buy five call contracts. The premium is determined by taking the price of the call and multiplying it by the number of contracts bought, then multiplying it by However, if a trader wanted to bet the stock would fall they would buy the puts.
Options can also be sold depending on the strategy a trader is using.
Continuing with the example above, if a trader thinks IBM shares are poised to rise, they can buy the call, or they can also choose to sell or write the put. In this case, the seller of the put would not pay a premium, but would receive the premium. In financial markets, stock options give the trader the right, but not the obligation, to buy or sell an underlying stock. Essentially, a stock option allows an investor to bet on the rise or fall of a given stock by a specific date in the future.
Often, large corporations will purchase stock options to hedge risk exposure to a given security. Typically, ESOs are issued by the company and cannot be sold, unlike standard listed or exchange-traded options. The holder may choose to immediately sell the stock in the open market for a profit or hold onto the stock over time. Stock options are a benefit often associated with startup companies, which may issue them in order to reward early employees when and if the company goes public.
They are awarded by some fast-growing companies as an incentive for employees to work towards growing the value of the company's shares.
The Downside Risk
Stock options can also serve as an incentive for employees to stay with the company. The options are canceled if the employee leaves the company before they vest. ESOs do not include any dividend or voting rights. Corporate benefits for some or all employees may include equity compensation plans. These plans are known for providing financial compensation in the form of stock equity. ESOs are just one type of equity compensation a company may offer. Other types of equity compensation may include:. In broad terms, the commonality between all these equity compensation plans is that they give employees and stakeholders an equity incentive to build the company and share in its growth and success.
The Pay-to-Performance Link
For employees, the key benefits of any type of equity compensation plan are:. The benefits of an equity compensation plan to employers are:. In terms of stock options, there are two main types:. There are two key parties in the ESO, the grantee employee and grantor employer. The grantee—also known as the optionee—can be an executive or an employee, while the grantor is the company that employs the grantee.
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The grantee is given equity compensation in the form of ESOs, usually with certain restrictions, one of the most important of which is the vesting period. The vesting period is the length of time that an employee must wait in order to be able to exercise their ESOs. Why does the employee need to wait? Because it gives the employee an incentive to perform well and stay with the company. Vesting follows a pre-determined schedule that is set up by the company at the time of the option grant. Note that the stock may not be fully vested when purchased with an option in certain cases, despite exercise of the stock options, as the company may not want to run the risk of employees making a quick gain by exercising their options and immediately selling their shares and subsequently leaving the company.
If you have received an options grant, you must carefully go through your company's stock options plan, as well as the options agreement, to determine the rights available and restrictions applied to employees. The options agreement will provide the key details of your option grant such as the vesting schedule, how the ESOs will vest, shares represented by the grant, and the strike price. If you are a key employee or executive, it may be possible to negotiate certain aspects of the options agreement, such as a vesting schedule where the shares vest faster, or a lower exercise price.
It may also be worthwhile to discuss the options agreement with your financial planner or wealth manager before you sign on the dotted line. ESOs typically vest in chunks over time at predetermined dates, as set out in the vesting schedule. As mentioned earlier, we had assumed that the ESOs have a term of 10 years. This means that after 10 years, you would no longer have the right to buy shares.
Therefore, the ESOs must be exercised before the year period counting from the date of the option grant is up. It should be emphasized that the record price for the shares is the exercise price or strike price specified in the options agreement, regardless of the actual market price of the stock. In some ESO agreements, a company may offer a reload option. A reload option is a nice provision to take advantage of.
We now arrive at the ESO spread. As will be seen later, this triggers a tax event whereby ordinary income tax is applied to the spread. The following points need to be borne in mind with regard to ESO taxation:.