Cashless Exercise

DEFINITION of 'Cashless Exercise'

A transaction that is used when exercising employee stock options (ESO). Essentially, what you do here is borrow enough money from your broker to exercise the options. You then simultaneously sell enough shares to pay for the purchase, taxes, and broker commissions.

BREAKING DOWN 'Cashless Exercise'

What you are doing is technically called buying on margin. The brokerage lets you buy on margin in this case because they know there will be a quick repayment. The advantage of this technique is you don't need the cash on hand.

RELATED TERMS
  1. Exercise Price

    The price at which the underlying security can be purchased (call ...
  2. Early Exercise

    The exercise of an option prior to its expiration date. Early ...
  3. Call Over

    When the buyer of a call option exercises the option. In options ...
  4. American Option

    An option that can be exercised anytime during its life. American ...
  5. Exercise Backdating

    A practice where option holders fraudulently claim to have exercised ...
  6. Aggregate Exercise Price

    The strike price of a put or call option multiplied by its contract ...
Related Articles
  1. Options & Futures

    Employee Stock Options: Definitions and Key Concepts

    By John Summa, CTA, PhD, Founder of HedgeMyOptions.com and OptionsNerd.comLet's begin with the participants – the grantee (employee) and grantor (employer). The latter is the company that ...
  2. Options & Futures

    Employee Stock Options: Premature Exercise Risks

    By John Summa, CTA, PhD, Founder of HedgeMyOptions.com and OptionsNerd.comTaxes are never a fun, or funny, topic but when you can demonstrate how much you can defer and ultimately reduce in taxes ...
  3. Options & Futures

    Employee Stock Options: Comparisons To Listed Options

    By John Summa, CTA, PhD, Founder of HedgeMyOptions.com and OptionsNerd.comThe biggest difference between listed options and ESOs is that ESOs are not traded. This is the difference that keeps ...
  4. 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.
  5. Options & Futures

    Employee Stock Options: Risk and Reward Associated with Owning ESOs

    By John Summa, CTA, PhD, Founder of HedgeMyOptions.com and OptionsNerd.comWhen you hold ESOs, as an employee you will have certain risks at all times, contrary to what you might believe or be ...
  6. Professionals

    Cashless Exercise of ISOs

    CFP online study guide - employee benefits planning - cashless exercise of incentive stock options or isos.
  7. Professionals

    Possible Outcomes For An Option

    Exercised If the option is exercised, the buyer has elected to exercise their rights to buy or sell the stock depending on the type of option involved. Exercising an option obligates the seller ...
  8. Options & Futures

    Employee Stock Options: Introduction

    By John Summa, CTA, PhD, Founder of HedgeMyOptions.com and OptionsNerd.comEmployee stock options, or ESOs, represent one form of equity compensation granted by companies to their employees and ...
  9. Professionals

    Calls And Puts

    Calls And Puts
  10. Options & Futures

    How To Avoid Closing Options Below Intrinsic Value

    To get the best return possible on your options trading, it is important to understand how options work and the markets in which they trade.
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. How do I change my strike price once the trade has been placed already?

    Learn how the strike prices for call and put options work, and understand how different types of options can be exercised ... Read Answer >>
  4. How is a put option exercised?

    A put option is a contract that gives the option holder the right, but not obligation, to sell a set amount of shares (1 ... Read Answer >>
  5. When holding an option through expiration date, are you automatically paid any profits, ...

    Holding an option through the expiration date without selling does not automatically guarantee you profits, but it might ... Read Answer >>
  6. My broker just sold securities out of my account without my permission. Is this legal?

    Your broker's actions are not legal unless he or she sold the securities under certain conditions. Let's look at the two ... Read Answer >>
Hot Definitions
  1. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  2. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  3. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center