Stock Options

December 05 2016

Get an overview of stock options by reading this tutorial.

What Stock Options Are

The right to purchase a share of P&G stock at a future date at the stock price on the day of the grant is represented by a stock option (grant price). Three years after the award date (vesting date), this privilege goes into effect and continues for a period of ten years (expiration date).

During the seven-year period, you can acquire the shares at any moment (option exercise). There are no additional fees or taxes to pay when you sell your shares at the new higher price. All of the exercises may be done online, and there is no upfront cost for you to participate.

Terms Used In This Guide

Date of expiration: The last day that stock option grants can be exercised. Currently, P&G's stock options expire 10 years after the date of issuance.

Grant date: The date the award is made to the employee. This is also the date used to determine the grant price of a stock option.

Grant price: The fixed price at which you can purchase a defined number of P&G shares during the option term. The grant price is determined based on the closing price for P&G stock on the New York Stock Exchange on the grant date.

Grant value: The total amount of the grant, which is determined by multiplying the number of stock options by the grant price.

Option exercise: The purchase of some or all of the stock from options that have been granted. Option exercises must be done after the grant has vested and prior to the end of the option term. After P&G shares are purchased, you can retain or sell some or all of the shares. Except in a few countries where prohibited by law, stock options can be purchased through a cashless exercise in which you can get net cash or net shares with no cash outlay on your part.

Option term: The active life of a stock option. P&G stock options currently have an option term of 10 years. At the end of 10 years, the stock options expire.

Profit: The gross amount of the gain (before taxes) resulting from the exercise of the stock option.

Vesting date: The first day that you can exercise your stock options. P&G stock options currently vest three years after the grant date. Vesting provisions can vary slightly in some countries due to local tax circumstances.

Stock Options Example

Assume that you are given a stock option at a grant price of $60. At some point in the future (after the vesting date) you decide to exercise your right to buy the shares at $60. The stock price is currently $90, which means your stock option has gained $30.

Vesting and Expiration Considerations

Vesting and expiration dates are an important feature of stock options. Vesting requires you to wait a certain amount of time before you can do anything with your stock options. Awards are currently vested after three years. Before being vested, you have no access to any potential gain in stock value.

Stock options expire after 10 years. After being vested, you can exercise the stock option or wait as long as 10 years if you think the stock price will continue to appreciate. However, if you do not exercise your stock options within 10 years of the grant date, you will lose them.

Value of Stock Options

As the market price of P&G’s stock changes, so does the potential value of each stock option. As the market price increases, so does the value of the option because you have the ability to purchase P&G stock at a price below market rates. Similarly, if the market price decreases, so does the value of the option. If the market value of P&G stock happens to be lower than the grant price, the stock options will have zero value at that point in time.

Other Considerations

Having stock options does not mean you actually own full shares of stock. There are no dividends or voting rights, and you cannot pledge the options as collateral.

Depending on the legal requirements in countries at the time of grant, some stock option grants might include unique conditions and restrictions beyond what is described in this guide.

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