What does it mean "to exercise" an option? When would you do this and when not?

Answer 1

The previous answers only addressed emplyee stock options. Since you have asked other questions about exchange traded options, I suspect that your are more interested in them than employee stock options.

If you exercise a call option, you buy 100 shares of the underlying stock for 100 times the strike price. If you exercise a put option, you sell 100 shares of the underlying stock for 100 times the strike price. Only the holder (also known as the buyer or the long position) can exercise an option. Once an option has been exercised it no longer exists.

Answer 2

An option does what it says on the tin. It gives you the right to buy a share at a certain price (the option). Exercising an option happens when you purchase a share at the "option price". Generally the option price is set when you are given the option. One hopes that the share price goes up aftet that. So you'd generally exercise the option when the current share price is above the option price. For example if you have an option for a Yahoo! share are $5 and the price is currently $10, you could exercise the option any buy something worth $10 for only £5.

Answer 3

Some companies offer some employees in a specific contract the option to buy some of their stock at a future date. The stock price to the employee is set at the time of the contract and thus is often less than it will be at the time in the future that the employee wants to sell. There is no cost to the employee on signing the contract and if the employee exercises the otipon when the stock is worth more than bought for minus any commisions, the employeee profits. The employee can sell at market price at any future date after the option is vested and before expiration. Vesting and expiration dates are noted in the contract.

Offerring employee stock options are for the purpose of attracting and keeping hard to replace employees.

wikipedia is fine at defining this:

http://en.wikilib.com/wiki/Employee_stock_option

You would exercise an option when it is most financially advantagous. Of course the current price should be > the option price (in the money) If the option price is higher than current price (below water) exercising the option would be like trading a dollar for 75 cents so no one does it. There are calculators out there if you are willing to type "employee stock option calculator" into google. These calcualtors allow you to put in several uncertain varaibles to determine when best time to cash in on stock options, but they require guessing what a future stock price might be.

If you are interested in non-employee stock option look here:
http://en.wikilib.com/wiki/Stock_option

Answer 4

This usually means a stock option. Employees and CEOS are sometimes given "stock options" as a reward for past work or incentive for future work in a company. As a reward for past work, you're given the option to purchase your company's shares at $1 a share when they're actually worth $3 a share, for instance. That's your reward, $2 times the number of shares you've been awarded. You would exercise your option to purchase the $1 shares when you feel your company's stock value is as high as it will go. You would NOT exercise your option to purchase $1 shares if your company's stock is below $1 a share, though, as your options are worthless at that point. That's when they're given as a "reward." Let's say your company's stock is worth $3 a share right now, and everyone's hoping it's going to hit $6. Well, your company may offer thousands of options to its employees at $5 a share, hoping everyone's hard work will pay off at some point in the future. At this point, the options are worthless, but may become valuable in the future, when/if the stock hits $6 a share. SO, you keep the options, but don't exercise them until they become valuable. Most of the time they don't.