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Lesson 8. Exercising Your Options > Which Options to Exercise - Pg. 38

Exercising Your Options Caution 38 Remember--your option agreement guarantees a certain price you will pay for the stock. It does not guarantee the fair market price at the time you exercise. Which Options to Exercise Your company may grant employee stock options on a regular schedule, such as every year or every six months. It is possible that you will have more than one grant available for exercise. It is almost certain that the options will have different grant prices and may have different vesting schedules. It is also possible you have a combination of nonstatutory stock options (NSOs) and incentive stock options (ISOs). This is why it is so important to keep good records of the grants. This way you will have a clear picture of which options are "in the money" and which aren't. It is not necessary to exercise options in the order you received them. You can skip over grants in favor of others that meet your needs. This can become a tax issue, which I discuss in Lesson 9. Tip If your company does not provide you with detailed statements on the status of your options, develop your own method of keeping track of them. A little work now can pay big dividends in the future. For now, let's look at a simple example to illustrate how important it is to keep careful records. We'll assume that all of these are vested options with no other restrictions. The current fair market price of the stock is $35 per share. Grant 1 2 3 4 5 Date Jan. 1998 July 1998 Jan. 1999 July 1999 Jan. 2000 Exercise Price $22 $32 $38 $29 $40 Type of Option ISO NSO NSO NSO ISO First, grants three and five are out of the money, so you can eliminate them from consideration. Grant one is an incentive stock option, which means you have to hold the stock more than one year to qualify for a favorable tax rate. It would be a good choice since you will pay no taxes until you sell the stock, assuming you meet the holding requirements. Grant two is barely in the money. You may want to wait on this one and see if the stock price rises far enough to make this a good exercise. Grant four is $6 in the money and may be a good candidate if you want to sell the stock immediately. To recap: Grant 1 2 3 4 5 Action Exercise and hold stock Hold Hold Exercise and sell stock Hold