Important Options Trading Terms

Options worth it or not. The Ins and Outs of Selling Options

Important Options Trading Terms

This grant is supposed to buy your loyalty and entice you to stay in the long-term, but paradoxically employees are often given next to no information on how much they are worth. Or worse, they are given rules of thumb passed down from other equally uninformed employees about their value.

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In a past life, I spent a bit of time tweaking the stock option plans of several companies. I want to clarify how you can go about understanding the value of your stock options.

Several things contribute to the eagerness to grant stock options. Yes, you heard that right.

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Well, since companies are generally issuing options at what they consider fair market value at the current time, the difference in these two numbers is zero. But if the company does well, the employees will exercise their options and see some gain from it.

Article Reviewed on July 30, Michael J Boyle Updated July 30, As you learn about trading optionsyou'll find that options traders use terms that are unique to options markets. You'll see these terms appear often and understanding them can have a significant effect on your chances for profitability on an options trade.

Whose slice of the pie are they eating out of? The other shareholders.

And so they issue more of them. To management at least, but not to shareholders. Your options are a right to buy shares in the company by paying an agreed upon price per share, called the strike price. The strike price is typically set by completing a A valuation with a third party assessor, who helps the company determine what the fair market value of the company is at the time the issue the new options packages.

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Vesting Along with this grant typically comes a vesting schedule. It states how many shares vest, or become purchasable to you at that agreed upon price, per period of time working at the company. Oftentimes vesting is done on an annual schedule.

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If you have a grant of 40, shares issued with a vesting schedule of four years, then on the one year anniversary you would be able to purchase 10, of those shares at the strike price. By the second year, you would be able to purchase 20, shares.

You can choose to actually exercise your options before a sale or other liquidity event. If you do, you have to pony up the cash. The benefit is that if you hold the stock for a year before a liquidity event, you get capital gains treatment rather than ordinary income treatment on your shares. If you leave the company, you will often have a window to purchase your shares or forfeit them.

What Are Options? ๐Ÿ“

That window can be as short as two or three months. Your other option is just to leave those options on the books. If you happen to be working at the company when the company is acquired, what will often happen is that the company will just wire you the difference between your options price options worth it or not the sale price per share without you having to pony up the cash.

The Bottom Line In the world of buying and selling stock optionschoices are made in regards to which strategy is best when considering a trade. Investors who are bullish can buy a call or sell a put, whereas if they're bearish, they can buy a put or sell a call.

If your company is publicly traded, the answer to this is easy: you can look up the going share price. For those issued stock in a private company, you need a few pieces of information to determine what your shares are worth: a valuation of the entire company and the number of shares outstanding.

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To get to a valuation of the company, you are typically looking at a multiple of revenue or profits. The range on good software companies, for example, could be anywhere between 3x and 10x revenue.

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The multiple to affix depends on the growth rate of the company, its gross margin, its profit margin, and several other key factors. How are you supposed to get this information? Fortunately, there are a few ways to get a sense.

What Are Stocks? ๐Ÿ“ˆ

The A valuation assessor. To create their assessment of the fair market options worth it or not, an assessor will look at these factors and compare it to public companies with similar characteristics.

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Second, they will also do their best to compare it to relevant acquisitions done in the market. Finally, they will look at any recent funding rounds done by the company and what price was paid by the new investors. They arrive at a number.

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Some caveats: This is based on market multiples today. In highly volatile markets like technology, average multiples can change by more than a turn or two in 12 months.

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This is based on company performance today. If the company is a high-growth rocket ship, the valuation company probably used premium market multiples.