Skip to main content

How to Maximize Your Stock Options

The Key Considerations You’ll Need to Best Leverage this Employee Benefit

Stock options have become a popular way for employers to compensate employees and incentivize high-quality work. Not only are they convenient and cost-effective for the employer, but they provide employees with added value for a job well done. When employees feel valued and do good work, the company’s stock value rises, and everyone wins.

Since stock options aren’t as cut and dry as a normal paycheck, though, many employees don’t fully understand how to make the most of them. Below we’ll discuss how stock options work, when to exercise them, and how to maximize this type of compensation.

The Basics of Employee Stock Options

When an employer offers stock options as part of your benefits package, it means you’ll have the opportunity to purchase a certain amount of company stock for a set price called the “grant price”, and typically within a set time frame. Most often, employers want to incentivize you to stay with the company long-term, so you may have to wait until your stock options vest – that is, until they reach the point in time when they become available to you to exercise. This means new employees usually can’t take advantage of them right away. Once they vest, you’ll have a specific time period in which to use your stock options before they expire.

Four Things to Consider Before Exercising Your Stock Options

Many employees want to exercise their stock options as soon as they are able. After all, it’s like creating a windfall for yourself similar to a cash bonus. However, that isn’t always the best option. These considerations will help you pick the proper timing:

1.     Understand What Type of Options You Have

Most likely, your stock options are either Incentive Stock Options or Non-Qualified Stock Options. Knowing which you have is important because they are taxed differently. Of course, this means taking a different approach with each type.

2.     Learn What Your Options Mean for Your Taxes

The biggest difference between Incentive Stock Options and Non-Qualified Stock Options are that Incentive Stock Options, called ISOs for short, often do not create a taxable event when you exercise them. This means you could hold onto those exercised options for a while and pay long-term capital gains taxes after a year or more. It should be noted, however, that the bargain element of an ISO exercise can cause alternative minimum tax to be paid. Non-Qualified Stock Options do create a taxable event when you exercise them, and they are counted as taxable income at your normal income tax rate. Down the road when you sell them, you’ll still owe capital gains tax, too.

3.     Consider Whether You Can Gain More Value if You Delay Exercising Your Options

The market is unpredictable, of course, and there are no guarantees when it comes to the performance of your employer either. Maybe you have reason to believe that the value of your stock options will continue to grow while your grant price stays the same. Regardless, you should discuss this decision to delay exercising your options until the expiration date with your financial advisor.


SEE ALSO: The Making of a Successful Retirement Starts with Maximizing Your Contributions

4.     Plan How You Will Use the Profits from Exercising Your Options

Anytime you’re expecting an influx of cash, you should have a plan for what you’ll do with it. Of course, you’ll need to set aside enough funds to cover your tax liability, but how you use the remaining money is up to you. It’s wise to have a specific goal in mind, and one that is congruent with the short-term and long-term financial goals you’ve already established. Consider things like paying down debt, supplementing your emergency fund, or saving toward a financial goal like buying a home.

An Example Scenario

Sometimes, talking about stock options in terms of a specific example can help with a more complete understanding of how to best use this benefit from your employer.

Let’s say you have been given the right to purchase 1,000 stock options at the grant price of $20.00 per share. You have until January 1, 2022, to exercise your option to purchase. You decide to wait a bit, and then you choose to exercise your options on July 1, 2021, by which point your company’s stock has reached a value of $35.00 per share.

So, you’ll buy 1,000 shares for a total of $20,000 according to your grant price, but you can sell those same shares for their current value of $35.00 per share – a total of $35,000. This means a profit of $15,000, from which you’ll need to set aside the funds you’ll need for taxes. Then, the rest is yours to do with as you please.

SEE ALSO: Are You Getting the Most Out of Your 401(k)?

Avoiding Stock Option Anxiety

Navigating stock options isn’t easy, and it causes many employees unnecessary anxiety and overwhelms. The best thing you can do for yourself is to learn as much as you can early on, rather than waiting until the last minute to figure everything out. Planning your strategy early gives you the best chance of maximizing the options available to you.

Stock options are a fantastic employment benefit, but they can be complicated to utilize properly. To ensure you’re maximizing your options, schedule a conversation with us today. We’ll match our professional guidance to your personal goals, and help you leverage your stock options for maximum financial success.


Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”).  This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.


Zachary Morris

Zachary Morris, CFP®

Having traveled to over 35 countries, Zach is a believer in Ralph Waldo Emerson’s statement that Life is about the journey, not the destination. Being a CERTIFIED FINANCIAL PLANNER™ provides Zach the opportunity to help clients define and realize their journey, and co-founding Paces Ferry Wealth Advisors, an independent firm, allows the freedom to define the client experience along the way.