What are my options?

We all like to do things, and sometimes we simply like the option of doing something.  Sometimes the mere existence of another option is enough to settle the stomach of a free spirit, who otherwise might feel shackled to the great machine of life.  So, if you're one of those people that like options, let's talk options. 

I'm not talking about the option of buying a Snickers over a Twix.  That's a decision nobody should have to make (eat both!).  I'm talking about options in business.  

The business world is riddled with options - options to buy or sell pretty much anything.  Understanding what an options is, or does, isn't difficult.  However, don't confuse that with the late-night infomercial that says you can make a killing by purchasing their software and then trade options while simultaneously sitting in your hot tub for 30 minutes a day. You can very well lose your shirt - no pun intended - if you don't do it right.  Many people don't do it right. But I digress...

I'd like to address Stock Options (basically because it sounds really cool.  Just say it 3 times and you'll know what I mean).  Basically a stock option means that you pay money (or give up monetary compensation) for an option to buy stock at a given price.  Let's listen in as Trevor is given the opportunity to buy stock from his company:

Big Boss: Trevor, you've been with the company for a while now, so we want to say thanks by giving you the opportunity to buy stock options.

Trevor: Uh, OK. How much are they?

Big Boss: Well, this option contract would allow you to buy 100 shares of company stock at $10 each.  That's called the STRIKE PRICE. So, whataya say? You want in?

Trevor: Well, Big Boss, I think that sounds faaaaantastic.  You see, company shares are currently selling for $12 on the open market. I'd like to exercise my "strike price" and buy those now and pocket the difference.

Big Boss: Slow down there, son.  We thought you'd say that, so we created something called a VESTING PERIOD.  It basically means that you have to buy the option now, and then exercise it later.  That cool?

Trevor: How much later?

Big Boss: 2 years. But you'll still be with the company in two years, and will have made us even more profitable by then, right? Right?

Trevor: Uh, ya. For sure.  Um, sounds OK to me.

So, in this scenario we have Trevor. A hard-working guy that has the opportunity to buy an option contract.  This contract is good IF company stock stays higher than $10 a share, and if Trevor intends on staying in compliance with any other terms in the contract.  In this scenario, the strike price was lower than the current selling price.  This rarely happens, and is referred to as IN THE MONEY.  Most likely, the option contract would have allowed Trevor to purchase shares at $15 a share (with current prices at $12/share).  This would be OUT OF THE MONEY.  Think of IN or OUT situations like this - if I bought and sold right NOW, would I lose or gain money?  If you made money in that scenario, start singing "I'm IN the money...." It's that easy.

That pretty much sums up the basics of stock options.  So, you in?