As an employee and an investor, you'll probably come across options at one point or another. Employees may be granted employee stock options as a form of compensation, and investors may hear about put and call options. While both of these concepts share the same name and some of the same lingo, they're quite distinct.
Employee stock options are granted to workers by a company's management, providing an opportunity to share in a company's success in the stock market. About 9 million employees held stock options in 2008, according to the National Center for Employee Ownership, a nonprofit research organization.
Put and call options are contracts to sell or purchase a stock or other security at a particular price. They're used as a way to speculate that a security will fall or rise, or as a form of insurance, known as a hedge, on another investment.
Employee Stock Options
When a company grants stock options to an employee, it will provide the following details:
The number of shares: This tells the employee how many shares of the company's stock he or she will be entitled to purchase under the options grant. Options may be granted by publicly traded companies or by private companies that intend to go public or be acquired one day.
The grant price: This is the price at which the employee will be able to purchase the stock. If the grant price is lower than the market price on the day the employee exercises the option, the options are said to be "in the money." Typically, options are given the price that's quoted in the stock market on the day they are granted.
The vesting date: This is the first date the options may be exercised. When exercising an option, the employee purchases the shares at the grant price, regardless of what price the stock is trading at that day in the market. Options must be exercised before their expiry date.
