Stock Options Quick Start Guide

Last updated: January 26, 2025 • 2 min read for busy professionals

Sometimes you just need the essentials—fast.
Our Quick Start Guides are designed for exactly that. In just 2 minutes, you’ll grasp the basics of key equity compensation topics. Ready for more? Dive into our calculators for personalized insights or explore our comprehensive guides to dig deeper.

Remember: Options have no value until exercised. Don’t let analysis paralysis make you miss opportunities – but also don’t rush without a plan.

The Essentials

Stock options give you the right to buy company stock at a fixed price (strike price), regardless of its current market value. Think of them as a coupon to buy stock at yesterday’s prices.

Three Things You Must Know

1. Two Types of Options

  • ISOs (Incentive Stock Options):
    • Better tax treatment possible
    • Must follow strict rules
  • Usually for employees only
  • NSOs (Non-Qualified Stock Options):
    • Simpler tax treatment
    • More flexible rules
    • Can be given to anyone

2. Key Terms

  • Strike Price: What you pay per share
  • Market Price: Current stock value
  • Spread: Market Price – Strike Price
  • Exercise: Actually buying the shares
  • Expiration: Use them or lose them date

3. Cost and Taxes

  • For ISOs:
    • No regular tax at exercise (but watch for AMT!)
    • Hold 2 years: Better tax treatment
    • Complex but potentially valuable
  • For NSOs:
    • Pay tax on spread at exercise
    • Always ordinary income
    • Simpler but higher taxes
  • Tax note: While ISOs don’t trigger regular tax at exercise, they can trigger Alternative Minimum Tax (AMT) on the “paper gain” (spread between strike price and market value). This can mean a significant tax bill even before you sell any shares.

Quick Decision Framework

Exercise Options Early If:

  • Strike price is very low
  • Strong belief in company
  • Can afford exercise cost
  • Want to start capital gains clock
  • Understand AMT impact (ISOs)

Wait to Exercise If:

  • Need more cash flow
  • Uncertain about company
  • High exercise cost
  • Recent grant
  • Complex tax situation

Common Pitfalls to Avoid

  • Letting options expire
  • Exercising without tax planning
  • Not understanding AMT (for ISOs)
  • Ignoring cash needed for exercise

Next Steps

Immediate Actions:

  • Identify your option type (ISO/NSO)
  • Check strike price and expiration
  • Calculate exercise costs
  • Plan exercise strategy
  • Consider AMT impact (ISOs)
Scroll to Top