Options are used as incentives to attract employees, or as is common in many technology companies, as part of a standard compensation plan for all workers. They can be very valuable, or they can expire worthless.
To illustrate these scenarios, consider an option for 1,000 shares of Widget Corp. granted on Jan. 15, 2008, when Widget shares closed for the day at $10. Under the terms of this options grant, the employee can exercise the shares no earlier than Jan. 15, 2009. On that day, if shares of Widget Corp. had risen to $30, the option would be "in the money." In other words, the employee could purchase the shares for $10, sell them immediately for $30 and net a profit of $20 per share, or $20,000. However, if the shares had fallen to $9 a share, the options would be considered "under water." That is, it wouldn't make sense to exercise the option, considering that the employee would be paying $10 for a stock that they could purchase for only $9 through their stock broker on the open market.
