If you are granted stock options by a company, are they actually buying options to give to you? Or is it all handled via internal accounting?
It varies from company to company, so there’s not really a good solid answer to this question.
Employee options are a very different animal than exchange-traded put and call options.
An employee option is an agreement under which the employee may purchase a specified number of shares in the company at an exercise price, most often the market value at the date of the issuance. They usually can only be exercised by the employee and not traded. There is often a vesting period of several years during which they cannot be exercised, and they frequently expire if the employment terminates during the vesting period (with detailed exceptions and conditions). There is also usually a several year period during which they may be exercised. One common feature is a “cashless exercise” in which the employee may receive the net increase in market value from the exercise price in cash, without actually putting up the money to exercise.
The exchange-traded options are standardized contracts under which someone agrees to buy (put) or sell (call) 100 shares of a particular security at a partular price, usually an even five dollar increment, on a date (one per month) several months into the future. People will pay a price (usually a small increment) to obtain one of these contracts which will allow them to sell (put) or buy (call) the shares to or from the party that issued the option. If the price of the underlying security is above the exercise price, a call option is “in the money” and worth the difference in price times the number of shares, and the corresponding put option is worthless. If the price of the underlying security is below the exercise price, a put option is “in the money” and worth the difference, and the call is worthless. These options are traded freely on options exchange.
In the companies where I was given options, the way it worked was that I was able to purchase stock at a vastly lower rate than it was currently trading for. Once I bought them, they were standard stock that was traded on the exchange, identical to any other stock.
What was typical was that they’d give you an amount of stock on a certain date. Let’s say Jan 1, 2000, they’d say “all engineers get 2000 options, vested over 4 years, at a 20% discount.” The 20% would apply to the stock price on that day. So if on Jan 1, 2000 the stock was selling for $10/share, I could buy it at $8/share. My price never changed, regardless of whether the actual selling price of the stock went up or down. I did have to put up the money to buy these; they weren’t my stock until I put a sale order in.
What really sucked at that point is that the way alternative minimum tax works, the minute I bought the option I owed the tax on it. I didn’t SELL the damn thing, I just bought it. Yup, I owed taxes on money I didn’t have. Fookin’ crazy and as far as I know the laws haven’t changed.
It does vary, but in general they’re not the same. Employee stock options are typically an agreement between the company and employee that the employee is entitled to purchase, on or after a certain date (and usually before a later date), a certain number of shares of the company’s stock from the company or its agent, at a specified price. Generally, this right is not transferable – you can choose to exercise it or not, but you can’t transfer that right to someone else. Once you exercise the option and purchase the shares, you can of course do whatever you like with them, subject to insider trading laws and regulations.
Exchange traded options are, as the name implies, intended to be traded openly, either as over-the-counter transactions between two specific parties, or through a derivatives exchange that serves as a clearing house. There may be no connection between the company and the parties who offer or purchase the option.
The Wikipedia article on stock options explains things reasonably well.