Can you sell stock immediately after exercising options?
The most notable advantage to an immediate exercise and sale of all your employee stock options is that you transfer the imbedded value of your employee stock option into cash. In other words, you transform paper value into real value via cash you can use right now.
Exercise stock options, and sell them within 12 months of exercising: Exercising your stock options and selling them within 12 months will very likely subject you to the short-term capital gains tax rate.
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. The proceeds you receive from an exercise-and-sell-to-cover transaction will be shares of stock.
To qualify for long-term capital gains tax rates for ISOs, you need to hold your shares for at least two years after your option grant date and one year after exercising. For NSOs, you need to hold your shares for at least one year after exercising.
In many cases it can be advantageous to exercise your stock options early (provided you have the cash, and assuming you believe in the company given you accepted a job there). The first benefit of exercising early is that you will likely have zero (or very little) tax liability at the time of exercise.
For a long call or put, the owner closes a trade by selling, rather than exercising the option. This trade often results in more profit due to the amount of time value remaining in the long option lifespan.
You don't need to exercise your options as soon as they vest. There are some legitimate reasons for waiting a bit longer to exercise. For example, you may have a ton of faith that the market price of the company stock will continue to increase over time.
Once you are ready to exercise your options, you typically have several ways of doing so: Cash payment: You can come up with the cash to exercise the options at the strike price. Cashless exercise: Some employers allow you to exercise your options by selling just enough of them to cover the costs of exercising others.
The vesting date is the official date that you are able to exercise your options. While this time can vary depending on your company, this is usually up to 10 years. Of course, you'll want to read the fine print of your stock options before making any decisions.
Hold on to that asset for longer than a year before you sell it, and it falls into the long-term gains column. (Certain capital gains tied to partnership interests held in connection with the performance of investment services now require a three-year holding period to be called a long-term gain.
Why not to exercise stock options?
The first rule of managing your employee stock options is to avoid premature exercises. Why? Because it forfeits the remaining "time premium" back to your employer and incurs an early compensation income tax to you, the employee.
If your income for the year already places you in a high income tax bracket, or additional income from stock options could push you into a higher income tax bracket, you may want to delay exercising your options or spread the exercise of options out over a few — potentially lower tax — years.
If you plan to hold your incentive stock option shares after you exercise them, a lower stock price may be a perfect time to exercise.
In general, an investor would sell a put option if their outlook on the underlying was bullish, and would sell a call option if their outlook on a specific asset was bearish.
Selling options is riskier because your potential losses are uncapped. As the option seller, you receive the premium upfront but are obligated to buy or sell the underlying asset at the strike price if assigned. This exposes you to unlimited risk if the market moves against your position.
As a call seller your maximum loss is unlimited. To reach breakeven point, the price of the option should increase to cover the strike price in addition to premium already paid. Your maximum gain as a call seller is the premium already received.
Early exercise of an option can make financial sense in some cases, such as when the stock is close to its strike price or the option is nearing its expiration date, or when selling an employee option early can help you avoid the alternative minimum tax (AMT).
For obvious reasons, you do not want to exercise underwater stock options, as you would being paying more for the shares than their current market price, and the exercise itself would not generate any tax loss that you could apply against other income.
Review: Exercising your options
Only consider early exercise if you're a very early employee. Otherwise, the best time to exercise is when your company begins the process of going public. If your company is already public, only exercise if the exercise price is below the fair market value of the shares.
If something fundamental about the company or its stock changes, that can be a good reason to sell. For example: The company's market share is falling, perhaps because a competitor is offering a superior product for a lower price. Sales growth has noticeably slowed.
What happens to stock options if company never goes public?
When and how you should exercise your stock options will depend on a number of factors. First, you'll likely want to wait until the company goes public, assuming it will. If you don't wait, and your company doesn't go public, your shares may become worth less than you paid – or even worthless.
In the US, the exercise price is typically set at the fair market value of the underlying stock as of the date the option is granted, in order to comply with certain requirements under US tax law.
When you exercise nonqualified stock options, your employer will most likely withhold a flat 22% for federal income taxes. However, you might be under-withheld if you're in the 32%, 35%, or 37% tax bracket. Stock options can be advantageous but can also create unexpected tax consequences.
Benefits of exercising options early
Lower holding time for NSOs: Early exercising of options helps start your holding period sooner so you may pay the lower long-term capital gains tax when you sell.
In case you didn't know, options market hours run from 9:30 a.m. to 4:00 p.m. Eastern Standard Time. Since the option's value is derived from the underlying stock's price, there's no reason for options to continue trading once the underlying stops trading. So, there is no after-hours options trading.
