How to Evaluate Stock Option Prices

by Terry Lane

    Stock options are a benefit given by public companies to their employees. Stock options are contracts that give employees the opportunity to buy company stock at a specific price on a future date. There are some exceptions, but employees with stock options generally can exercise them at any point before the contract expires, but buying them early could result in lost returns on the investment. Evaluating a stock option price requires comparing current market information with the details of your stock option contract.

    Step 1

    Check the "grant price" of the stock option, which is the price at which you can buy shares. This is documented in the contract and is usually the market price of the stock when the options are issued. Compare this price with the current market price for shares of the stock, which can be found on any financial news website that displays up-to-date market information. If the price of the stock is more than the grant price, you can "exercise" the option, which lets you buy the shares of the stock at a price lower than it is selling on the market, giving you an instant profit/capital gain.

    Step 2

    Examine the stocks 52-week history and other data to help forecast how the stock will be performing when it's contract expires. Most employee stock options have an expiration date of 10 years. Often stock options have vesting periods for employee duration. For example, an employee of one year may only be able to sell 20 percent of the stocks for which they were issued options. Most are vested within four years. Conventional wisdom suggests that a stock option should be held until it is close to its expiration date, according to CNN Money.

    Step 3

    Determine what taxes you would owe by exercising the options. Find out if your options are non-qualified stock options or incentive stock options, which are usually granted to executives and can sometimes trigger requirements under the alternative minimum tax. Most employees have non-qualified stock options and must pay income tax on the difference between the grant price and the exercise price.

    Step 4

    Exercise your options if you are losing confidence in your company's performance and believe it will not be able to maintain its stock price. You may also want to cash out your options if you are over extended on company stock. You shouldn't keep more than 10 percent of company stock in your portfolio. Exercising your options can also keep you from going into a higher tax bracket.

    Step 5

    Decide which method to use to exercise a stock option. If you have the money, you can pay cash for the stocks. You can buy the stocks on margin, which is essentially a loan from a broker, who then sells enough shares to cover costs and commissions. If you already own company stock, some employers will let you exchange them for the shares in your option contract, which usually increases your number of company shares.

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    About the Author

    Terry Lane has been a journalist and writer since 1997. He has both covered, and worked for, members of Congress and has helped legislators and executives publish op-eds in the “Wall Street Journal,” “National Journal” and “Politico." He earned a Bachelor of Science in journalism from the University of Florida.

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