How to Investigate Stock Options
- 1). Check the 52-week high and low for the stock in question. This will give you a good idea of how volatile the stock has been and how likely it is to sell for more than the strike price of the option. You can find the 52-week high and low of the stock in a financial publication like the Wall Street Journal or Investors Business Daily, or online at sites like CNN Money and Yahoo! Finance. Knowing the 52-week history of the stock price can help you estimate the odds of the stock trading above its strike price in the future. For instance, a stock with a 52-week high of $10 might have trouble reaching its strike price of $20, while a stock that has traded as high as $50 might be more likely to reach its $55 strike price. The latter option would be the one to watch more closely if you need to allocate your attention to more favorable opportunities.
- 2). Find the strike prices of the options you are being offered. The strike price should be listed on the paperwork you receive with the stock option grant or stock option offer. Compare the strike price to the current price of the stock. If the strike price is less than the current market price, you can make money by exercising those options and taking your profit. But if the strike price is higher than the current market price, those options are said to be "underwater," and you will not make any money by exercising them. For instance, if the strike price is $25 and the current stock price is $50, you would make $25 for every option you exercise. But if the market price is only $20, you would not realize a profit from exercising your options.
Even though you have no control over the short-term movement in the stock price, checking the price on a regular basis helps you keep track of your holdings. You never know when the price of the stock will tick up in response to positive market news and getting into the habit of checking the price allows you to be ready to make your move. - 3). Contact the human resources department at your employer to determine when you become vested in the stock options you are granted. Many companies use a vesting schedule to discourage short-term decision-making on the part of executives and employees. A typical arrangement uses a one-year vesting schedule, meaning that you cannot sell the stock options you receive today until a year has passed.
- 4). Check your potential profit of the options that you are eligible to sell based on their historical prices and decide whether you want to exercise the options at current prices and lock in your profit or wait for a higher price later on. Keep abreast on whether or not your company reprices its options -- you may be able to exchange underwater options for options that are "in the money."
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