Option Stock:
Some Useful Information

Option stock refers to a company’s shares that are converted from the options granted to employees after it is exercised and being converted to shares.

Stock options are a commonly used as part of the compensation package by many major corporations. It is estimated that over 80 - 90% of the Fortune 1000 firms uses them as the part of their employees’ overall remunerations. It is an effective way for companies to reward employees and as a method to align the employees’ interests with the company’s overall performance. The granting of options results in an increased broad based employees’ share ownership of the company which will bode well for the company in terms of improved employees’ productivity.

Options that are granted to a employee are essentially similar to a call option, in which it gives the employee the right, but not obligation, to purchase the company’s shares at a predetermined price at the point of issuance.

Some general information and guidelines about option stocks:

Simultaneous exercise of the option into shares and selling the shares to reap the immediate profit through a broker (usually assigned by the company) is allowed.

Granting of option to the employee does not constitute a tax deduction to the company, i.e., the company is not allowed to enjoy a deduction based on the difference between the predetermined strike price and the current market price of the option stock.

Employees of the company that grant the option will not be taxed upon the exercise of the option. The tax will only come into effect when then option stock is sold in the stock market, with the price difference between the strike price and the selling price being treated as capital gain.

Disposition: A short selling position is regarded as disposition whereas purchasing of put option in the market is not deemed as a disposition.

Employees that are granted the option will only exercise it at some point in time when the market price of the company’s shares is performing well and thus resulted in immediate paper gain (i.e. the option stock is held for a longer period with the intent to sell later) or realized gain if the shares is sold simultaneously.

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