Exercising Stock Options

Exercising Stock Options. Information on exercising stock options.

Although there are quite a few methods to exercise options but equating them evenly, they all fall into 3 basic slots…

1. Paying in cash, where the money is paid and the stock certificates are received.

2. By swapping company stock already held, wherein instead of paying cash to exercise the option, one can exchange the stock already held for any new stock that is preferred. However, it is important to keep in mind that the exchange is not treated as a sale.

3. Cashless dealings.

Cashless exercising has several variations out of which the first category is merely a modification of the method. This is mostly preferred by company executives. Let us take an example. If a person holds an option to acquire 10,000 shares at $10 per (the exercise price is $100,000) with a market value of $25 per share, the person would need 4000 existing shares ($100,000/25) to meet the exercise price. The increase in this case, in net worth, after exercise would be $150,000, which means 6000 net increase in shares at $25 market price.

Another variation would be “Pyramiding” or progressive exercise with existing as well as new shares. In such a case, an option holder not having enough existing stock can achieve the same result as a stock exercise with the ‘Pyramiding’ technique. The holder will typically start with a small amount of shares, and using the stock acquired exercise the additional stock under option.

Yet another variation could be the “immaculate exercise” where the option holder not currently owning stock, instructs the issuer to withhold the stock, which would otherwise be issued, the amount required to satisfy the exercise price (at current value).

“Broker Financed Stock Exercise” allows a broker to temporarily finance the exercise of a stock option by using a Signed Exercise Notice as collateral. Following this technique, the option holder submits the Exercise Notice to the issuer to deliver the stock to the broker, who then advances funds to the issuer in return for the stock. The issuer retains just enough stock at current market price to satisfy the loan as also pay the broker’s commission. The remaining stock is then transmitted to the option holder.