Once your stock options vest, you have the right, but not the obligation to exercise them. To exercise your options, you purchase stock shares at their exercise price, rather than their fair market value on that day. The lower your exercise price is compared to the stock’s fair market value at exercise, the better “discount” you’ll receive on your exercised shares. For example, say your exercise price is $1/share for 1,000 shares of company stock, which is currently trading at $5/share. You can purchase those shares for $1,000, even though they’ll be immediately worth $5,000. You can then continue to hold those shares, and hope the price continues to rise. Or, you could sell them, and pocket the after-tax difference.
