What Happens If I Have Unexercised Stocks I Don't Sell?

Employee Stock Options

Many people confuse stock options with the more restricted employee stock options. Employee stock options give employees the right to buy company stock, usually well below market price. Employee stock options cannot be bought or sold. Employers give these options, often as bonuses, with the strike price set at the company's current share price. Employees have to wait for the options to vest (pass a waiting period) before they can exercise them, which means use them to buy company stock. If you do not exercise employee options before their stated expiration date, the options expire and become worthless. If your company's share price has dropped below the strike price, don't exercise the options.

Stock options are bought and sold on options exchanges. In financial markets, options can be either puts (right to sell) or calls (right to buy). Investors buy an option separate from the shares that give the option its value. If you do not exercise or sell an option by its stated expiration date, it simply expires. However, unlike employee stock options, you can report the cost of an expired option on your taxes as a capital loss.

Options contracts are part of a confusing category of financial instruments called derivatives. Derivatives get their value from another financial instrument that is sold separately. If you buy a call option for 100 shares of Corporation X at a strike price of $10, you have a contract to buy 100 shares for $10 each, but you do not own the shares. If the shares still cost $10 on the contract's expiration date, you can let the contract expire and nothing happens. But if the price went up to $15, you can take the contract to a broker, exercise the option by paying $1,000 and receive shares that you can immediately sell for $1500, a profit of $500. Or you can sell the option contract itself on the market for about $500.

Stock is actually the initial capital that a company starts with, and represents ownership. When you buy one share, you buy a fraction of that initial capital, which translates to a tiny amount of ownership in the company. You can buy, sell and hold (keep) shares, but not exercise them. If you leave your shares alone, one of several things can happen. The company can go bankrupt and your shares can become worthless. Or the company can change its name or be bought out, in which case your shares are recalled and you will need to have your broker exchange them for new shares before using them again. In some situations, the company continues growing and generating profit for decades, and your investment grows.