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What are Stock Options?

1. What are Stock Options? Stock Options are the right to purchase stock at a given price at some time in the future. 2. Types of Stock Opti...

1. What are Stock Options?

Stock Options are the right to purchase stock at a given price at some time in the future.

2. Types of Stock Options:

2.1 Incentive stock options in which the employee is able to defer taxation until the shares bought with the option are sold. The company does not receive a tax deduction for this type of option.

2.2 Non-qualified stock options in which the employee must pay income tax on the 'spread' between the value of the stock and the amount paid for the option. The company may receive a tax deduction on the 'spread'.

Quotes on Stock Options:

• “If stock options aren’t a form of compensation, what are they? If compensation isn’t an expense, what is it? And, if expenses shouldn’t go into the calculation of earnings, where in the world do they go?” – Warren Buffett, CEO, Berkshire Hathaway

• “Virtually every corporate disaster that has struck in recent years has had a stock option component…Stock option abuses have damaged investor confidence in American business,” – Sen. Carl Levin (D-Mich.)

• “The Financial Accounting Standards Board has put itself on the line and said there's an expense attached to stock options, I am waiting restlessly for this to happen.'' – William H. Donaldosn, Securities and Exchange Commission Chairman

• "I can't understand how executives can make tens of millions of dollars on options the same year the company goes bankrupt,” – Paul Volcker, former Federal Reserve Chairman

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