Outstanding Stock Options: Everything You Need to Know
Outstanding stock options refer to unexercised and non-expired rights to purchase or sell the shares of a company.3 min read
Outstanding stock options refer to unexercised and non-expired rights to purchase or sell the shares of a company. They can be short-term or medium-term investments. If you are an investor, it is important to know how much each outstanding stock option contract costs and when it can be exercised. Also, you need to manage expiration dates properly, or else you may lose the opportunity to buy or sell stock at an attractive price.
What Is a Stock Option?
A stock option refers to the right to purchase a certain number of shares from an issuing company at a fixed price for a certain amount of time. If an option is correctly valued and exercised in such a way that it minimizes the tax consequences, it can contribute significantly to your overall wealth. Stock options may make up a substantial portion of the compensation paid to a corporate executive. However, they are not exactly the same as cash.
Traditionally, companies have been using stock options to reward their top executives and align their interests with those of their shareholders. Also known as the “grant price,” the price of a stock option is typically the market price at the time it is granted. Usually, option rights are vested, which means that you can only exercise a certain percentage of your stock options at different points in time. In most cases, there is a time limit for exercising stock options, which is generally 10 years after they are granted.
What Is an Outstanding Stock Option?
An outstanding stock option refers to an option contract that has not been exercised and has not expired. An option contract has monetary and intrinsic value. There are several things you can do with a stock option, including:
- Exercising the stock option to purchase or sell the underlying stock
- Purchasing or selling the option on the open market
- Allowing the option to expire without any action or value
An outstanding stock option contract can be a short-term or medium-term investment. It can be traded for a relatively small price or exercised for a much greater investment of the underlying stock. An investor needs to know the price of an open contract and that one contract covers 100 shares of underlying stock.
It is important to note that you can exercise an American-style option any time between the purchase and expiration dates, while a European-style option can only be exercised when the contract expires. You have to make sure that the expiration dates of your outstanding stock options are properly managed, because missing an expiration date can result in the loss of an opportunity to buy or sell stock at a good price.
Understanding Outstanding Shares
Also called shares outstanding, outstanding shares refer to the stock of a company that is currently owned by its shareholders. They include share blocks owned by institutional investors and restricted shares held by the officers and insiders of the company. These shares are listed under the heading “Capital Stock” in a company's balance sheet. The amount of outstanding shares facilitates the calculation of key metrics such as the company's market capitalization, earnings per share, and cash flow per share. The amount is not static and can fluctuate significantly over time.
There are a number of reasons why the outstanding shares of a company may fluctuate. The number of outstanding shares will rise if the company decides to issue additional shares. Typically, companies issue shares when they are raising funds through equity financing, exercising employee stock options, or other financial instruments. There will be a decrease in outstanding shares if the company decides to use a share repurchase program to buy back its shares.
Besides listing its outstanding shares on its balance sheet, a publicly traded company is required to report the amounts of issued and outstanding shares it holds. Such information is generally packaged within its website's investor relations section or on a local stock exchange website. In the U.S., information about outstanding shares can be found in the Securities and Exchange Commission quarterly filings.
Outstanding shares can be held by outside investors, people within the company, or entities affiliated with the company. They do not include shares that are repurchased by the company. Such shares are referred to as treasury stock.
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