Stock Option
A stock option gives the holder the right to buy a specified number of shares at a fixed exercise price before expiration, subject to award terms.
Basic example
An employee can buy:
10,000 shares
at:
$15 per share
If the stock trades at $25:
intrinsic value is:
$10 × 10,000 = $100,000
before taxes and other considerations.
If the stock remains below $15, the option can have no intrinsic value.
Exercise price
The exercise price is fixed by the award terms.
Unlike an RSU, an option does not normally deliver full share value simply because it vested.
The stock price must exceed the strike for positive intrinsic value.
Vesting and expiration
An option might:
- vest over three years
- expire after ten years
Once vested, the employee can generally exercise subject to plan terms.
An unexercised option can still expire worthless.
Real 2026 disclosure
A 2026 Form 10-Q reported stock-option expense, weighted-average exercise prices and remaining contractual life.[1]
Another filing described options with vesting conditions and contractual terms of up to ten years.[2]
Those variables are central to actual option economics.
Options vs. RSUs
Assume stock price is $20.
RSU: - one vested unit can be worth about $20
Option struck at $20: - intrinsic value is $0
If stock rises to $40:
- RSU value: about $40
- option intrinsic value: about $20
Options provide more leveraged upside.
Exercise can create dilution
When an option is exercised:
- the company can receive the exercise price
- new shares can be issued
- shares outstanding can rise
The exercise is not identical to a free stock grant because cash can enter the company.
Treasury-stock method
Diluted EPS often assumes exercise of qualifying options and uses assumed proceeds to repurchase shares at an average market price.
Therefore:
gross options outstanding ≠ incremental diluted shares
The accounting denominator can be smaller than the headline option count.
Out-of-the-money options
Options with strikes above the current stock price can be anti-dilutive and excluded from current diluted EPS.
They remain potential future dilution if the share price rises.
Option valuation
Grant-date fair value can use option-pricing models with inputs such as:
- stock price
- exercise price
- volatility
- expected term
- risk-free rate
- dividend assumptions
Accounting fair value is not the same as eventual employee profit.
Common mistakes
"A stock option is a share."
No.
"Every option dilutes immediately."
No.
"Out-of-the-money options can never dilute."
They can later.
"Option count equals diluted shares."
Not necessarily.
Example
An option to buy 10,000 shares at $15 has $100,000 of intrinsic value if the stock trades at $25.
Professional note
Review exercise price, vesting, expiration, option count, intrinsic value and diluted-EPS treatment. Compare option issuance with repurchases. The shareholder cost appears through both compensation expense and potential dilution.
Related terms
- Stock-Based Compensation
Stock-based compensation is compensation paid through equity-linked awards such as restricted stock, RSUs, performance awards and options. The expense can be noncash when recognized but can still create shareholder dilution.
- Diluted Weighted-Average Shares Outstanding
Diluted weighted-average shares outstanding are the EPS denominator after starting with basic weighted-average shares and adding the effect of qualifying potentially dilutive securities.
- Common Stock
Common stock represents an ownership interest in a corporation and generally carries a residual claim after creditors and senior securities.
- Share Dilution
Share dilution occurs when new shares or share equivalents increase the ownership denominator and reduce an existing shareholder’s percentage claim unless the holder participates proportionally.
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