07/22/96 TABLE: An Options Primer

An Options Primer

Options can range from the plain vanilla to the ultra-esoteric. Here's how to make sense of the Babel. INCENTIVE STOCK OPTIONS (ISOs) An option that qualifies for favorable tax treatment as long as you hold the shares for two years after the grant and one year after exercise. Any gain realized from the time of the grant to the time of the sale is taxed as capital gains. INDEXED OPTION An option to buy company stock with an exercise price that periodically adjusts upward or downward in relation to market or industry indicators. IN-THE-MONEY OPTION An option where the current share price is greater than the exercise price. MEGA-GRANT A large, usually one-time grant of options or shares to top executives that can be as much as three to five times the size of a normal grant. LEVERAGED OPTION A plan promoting share ownership. For each share of company stock held or invested, the employee receives a certain number of additional options. Also, an option plan where the number of shares exercised increases based on stock-price movement or other financial performance. NONQUALIFIED STOCK OPTION When you exercise this option and purchase the shares, the difference between the price paid for the stock and the fair market value at the time of exercise is taxed as ordinary income. When you sell the stock, any subsequent appreciation is taxed as capital gains. PERFORMANCE OPTION An option where the grant, exercise price, or vesting is contingent on the company achieving financial or other goals. PHANTOM STOCK The next best thing for employees in certain countries where options aren't permitted. It consists of units equal to the fair market value, book value, or a formula price at the date of grant. At a specified future date, the employee is paid the appreciation in the value of the units. RELOAD OPTION An option to buy company stock that is granted with the provision that upon exercise, if the exercise price is paid in previously owned shares, a new option is automatically granted for the number of shares used in the exercise. STOCK-APPRECIATION RIGHT An award paid in cash or shares that gives the employee the appreciation on the stock from the time of award to the exercise date. When granted in tandem with options, the exercise of the stock-appreciation right cancels the option. UNDERWATER OR ``JACQUES COUSTEAU'' OPTION An option that has lost value because the current market price has fallen below the original exercise price. DATA: KPMG PEAT MARWICK