A stock option gives the employee the right to buy one share stock at a certain price, called the strike or exercise price, at any time within a certain time period, usually 10 years. The strike price is usually equal to the stock’s market price on the date of grant.

A single option grant usually vests, or becomes available to exercise, gradually over a number of years. For example, if you receive 1,000 options and a four-year vesting period, you might be able to exercise 250 per year. This encourages the employee to remain at the firm.

If the stock’s market price rises above the strike price, the options are said to be "in the money" or "above water." At this point, you can exercise any vested options and buy stock. Most people immediately sell their shares to lock in their gain, although you can continue to hold onto them.

If the stock’s market price falls below the strike price, the shares are said to be "under water" or "out of the money" and can not be immediately exercised.

If you leave the company, you generally have a short period of time, 30 to 90 days, to exercise any vested options or forfeit them. Any unvested options will also be forfeited.

There are two types of stock options, nonqualified and incentive. They differ mainly in how they are taxed.

For more information, see www.mystockoptions.com.