Employee Stock Options - Non-Qualified Stock Options


Background

  • A non-qualified stock option (NQSO) is any option other than an incentive stock option.
  • Non-qualified stock options have greater flexibility than incentive stock options in a number of ways.
    1. Shareholders approval is not required.
    2. There is far greater flexibility for the employer to grant the options as to terms of the grant, vesting and period over which they may be exercised (e.g. no limits on the annual value of the grant or any requirement that the option be out of the money at the grant date).
    3. There is greater flexibility as to whom the option may be granted: an employee, independent contractor as well as any family members of the foregoing.
    4. There are more transferability options for holders of NQSOs.

Tax Implications

  • Grant - no taxable event is triggered when options are granted as the strike price and market price are nearly identical.
  • Exercise - to the extent that the option is in the money, that amount is deemed W-2 income and subject to payroll tax.
  • Basis - after exercise, the strike price plus the in-the-money amount serve as the basis in the shares for the computation of any capital gains.
  • Sale (disposition) - there are two options here:
    1. The sale of shares results in a capital gain/loss, depending upon whether or not the option is in the money.
    2. The holding period determines whether the capital gain is long- or short-term.
Transferability of NQSOs


Related Articles
  1. Options & Futures

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.
  2. Options & Futures

    Options Pricing: A Review Of Basic Terms

    The following is intended as a review of basic option terminology, which can be used as a reference as needed: American Options - An option that can be at any point during the life of the contract. ...
  3. Investing

    The Best Strategies to Manage Your Stock Options

    We look at strategies to help manage taxes and the exercise of incentive and non-qualified stock options.
  4. Options & Futures

    The Benefits And Value Of Stock Options

    The pros and cons of corporate stock options have been debated since the incentive was created. Learn more about stock option basics and the cost of stock options.
  5. Options & Futures

    4 Reasons To Hold Onto An Option

    There are times when an investor shouldn't exercise an option. Find out when to hold and when to fold.
  6. Options & Futures

    Introduction - Day Trading and Options

    Options have not been a tradition part of day-trading strategy, but this is quickly changing.
  7. Stock Analysis

    Our View on Stock Options

    In this piece, David Harper wades deep into the option expensing ruling and what this really means to investors.
  8. Options & Futures

    A Newbie's Guide To Reading An Options Chain

    Learning to understand the language of options chains will help you become a more informed trader.
  9. Options & Futures

    Options Pricing

    Options are valued in a variety of different ways. Learn about how options are priced with this tutorial.
  10. Stock Analysis

    How To Read An Options Table

    With more information available and the ability to quickly trade options online, investors are becoming savvier with using options to speculate, hedge and create their own financial strategies ...
RELATED TERMS
  1. Grant

    The issuance of an award, such as a stock option, to key employees ...
  2. Non-Qualified Stock Option - NSO

    A type of employee stock option where you pay ordinary income ...
  3. Reload Option

    A type of employee compensation in which additional stock options ...
  4. American Option

    An option that can be exercised anytime during its life. American ...
  5. Spring Loading

    An option-granting practice in which options are granted at a ...
  6. Option Schedule

    A list of options grants to an employee or employees of a company ...
RELATED FAQS
  1. What are the SEC regulations on exercising stock options?

    Learn how the SEC and IRS regulate employee stock options, including the exercise of options and the sale of options, and ... Read Answer >>
  2. After exercising a put option, can I still hold my option contract in order to sell ...

    Once a put option contract has been exercised, that contract does not exist anymore. A put option grants you the right to ... Read Answer >>
  3. Do options make more sense during bull or bear markets?

    Understand how options may be used in both bullish and bearish markets, and learn the basics of options pricing and certain ... Read Answer >>
  4. How do speculators profit from options?

    As a quick summary, options are financial derivatives that give their holders the right to buy or sell a specific asset by ... Read Answer >>
  5. What's the difference between a regular option and an exotic option?

    Before learning about exotic options, you should have a fairly good understanding of regular options. Both types of options ... Read Answer >>
  6. Why are options very active when they are at the money?

    Stock options, whether they are put or call options, can become very active when they are at the money. In the money options ... Read Answer >>
Hot Definitions
  1. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  2. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  3. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  4. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  5. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
Trading Center