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Lesson 3. An Investing Primer > The 30-Second Recap - Pg. 15

An Investing Primer 15 · Intrinsic value --Options have value when the exercise price is lower than the fair market value of the stock. This intrinsic value is only one of two types of values (see time value later in this list). · Option agreement --The option agreement spells out the terms of the grant: how much per share, how many shares, and how long of term. Any other conditions or restrictions should be included in the option agreement. · Spread --The spread is the difference between the exercise price and the fair market value of the stock. For example, an option has a strike price of $20 per share. The underlying stock has a fair market price of $25 per share. The spread is +$5 per share and the option is "in the money." When the fair market price of the stock is lower than the option's strike price, the spread is negative and the option is "out of the money." Price $20 $20 Exercise Price $25 $10 Market Spread +$5 -$10 · Time value --Options have value in the length of their term. In other words, an option with a term of 10 years has value because the stock may rise during this period, making the option more valuable. Even options that are presently "out of the money" have time value if there is time remaining on their term. · Vesting --Many companies use employee stock options to encourage workers to stay with the company. You may be required to wait a certain period of time before you have access to the options. This is vesting. I discuss vesting in more detail in Lesson 4, "All About Vesting, Lock-Ups, etc." Options and Taxes