A "Stock Option" is the RIGHT (or OPTION) to purchase x # of shares of a company's stock at a pre-determined price, the "STRIKE price".
STOCK OPTIONS are granted (given) to an individual for (usually) a set period of time. During this time you will "VEST". VESTING means you have to wait for a date to pass, then your option(s) become EXCERCISABLE. There may be another date when your option to buy expires... if you fail to purchase your shares prior to the expiration date (excercise your options) you lose the ability to buy those shares at the strike price, they expire - you can't have them - you screwed up!
"Most" companies will extend the expiration date several years beyond the vested date so your options have time to grow in value. IF the current price of the stock is trading BELOW your strike price the options are considered WORTHLESS.
The theory is that a company is giving you something that YOU hope will be worth more than the strike price at a future date. Deferred compensation' if you will. It is the corporate version of the "carrot and the stick".
SO - if a company "grants" you an OPTION to purchase 1000 shares at a STRIKE PRICE of $10. Say you VEST in 2 years. On the anniversary of your GRANT 2 years later, the stock is trading at $15/share. You EXCERCISE your OPTIONS, buy the stock at $10. You now have to give the broker $10,000 to pay for the purchase. However, since MOST people do not have the cash laying around, (especially pilots) most companies have an arrangment with a Brokerage Firm (I believe that SWA uses Morgan Stanley) where you can do what is known as a CASHLESS EXCERCISE. In your brokerage account (yes you have to 1st set up the account with the company's broker of choice) they will "loan" you the cash to purchase the shares, then you immediately sell them. In our hypothetical above, you would net a $5,000 profit.
You have several choices as to how you structure your purchase of your shares;
You can elect to sell only the # of shares to repay the loan - 667 shares in our example=$10,000. You would then keep the remaining 333 shares free and clear!! OR, write a check to the broker for $10,000 and keep all 1,000 shares. Or, as stated above, sell all 1000 shares and walk with $5000 cash.
I hope that my years as an investment advisor help shed some light on this cornfusing topic?!?!?
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