Automatic Exercise

  

Categories: Derivatives, Trading, Stocks

It would be nice if this referred to a system that allowed your body to workout while your mind did something else - sleeping, reading, watching TV, dreaming of chocolate cake, etc. Just imagine doing 1,000 crunches a day without ever realizing it...Alas, automatic exercise has to do with the options market instead.
First, let's set out a few basics. An option is a contract that gives you the right to do something (like buy a stock) but not the obligation. So if you hold an option to buy a stock at a certain price and the stock never reaches that price, you don't have to exercise it. You can just let it sit. However, if the stock rises above that price, you can cash in the option and make a profit.
A couple more background items that come into play here: 1) In-the-money options are options that are profitable. 2) Every option has an expiration date.
Now just imagine if you have an option that's in the money, except you fail to exercise the option by its expiration date. So the option dies a worthless death, while you blithely watch cat videos on YouTube.
Automatic exercise prevents this. By setting up an automatic exercise, in-the-money options will get exercised without the option holding giving explicit instructions. This avoids any expensive oopsies and allows traders to be as distracted as they want to be.

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Finance: What Does It Mean to Be Vested?227 Views

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finance a la shmoop. what does it mean to be vested ?well here's what I mean

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invested but vested in a financial sense has almost nothing to do with Cashmere. in [man in sweater vest smiles and waves]

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most applications the term vested refers to stock option grants. and if you don't

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know what a stock option is to stop watching now and go watch the stock

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option video first. all right well these things are complex in the way they work

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because they're more or less the modern-day equivalent of golden

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handcuffs ,and no not the Fifty Shades kind .when an employee joins a typical

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private small Silicon Valley technology company they're granted say twenty

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thousand stock options in the company. the standard structure of an esop or

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employee stock option plan. not the guy who wrote fables. the normal structure is

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that the options vest over four years with a one-year cliff. what does all this

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mean? well the one year cliff means that an employee vests or owns zero of the

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options she has been granted until she hits her one-year anniversary at you

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know whatever dot-com. it kind of sort of works like this. [ people celebrate]

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your parents have decided to give you 20 bucks a month on your 14th birthday but

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you don't get to start collecting the money until your 15th birthday and on

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your 15th birthday you get a big fat check for $240. at 12 months times 20

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bucks using advanced calculus there. now that you're 15 you get 20 bucks a month

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for three more years or thirty six more months until you turn 18 and then you're

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on your own no more allowance for you. so now let's

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take this structure and apply it to a stock option grant. well the employee has

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granted 20,000 options she gets none for the first 12 months but then after 12

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months she vests or wears 1/4 of the options she was granted. she now legally

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has title ownership of those granted options. even if the company fires her

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the next day she still keeps those options but going forward she'll vest [Donald Trump fires someone]

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monthly and be still at the company for another 36 months,

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for a total of 48 months to fully vest into ownership of the 20,000 options. why

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the one-year cliff well because many employees simply don't work out at

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startups and because resources are slim companies have to fire employees who

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just aren't cutting it quickly or the companies go bankrupt in everyone's out

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of a job. and you know that goes well the one year cliff exists so that companies

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can evaluate employees carefully before granting them a meaningful ownership

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stake in the company. note that these are just options she's vesting into as

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well. she doesn't own the stock. if she wants to buy out the options

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she'll pay per share whatever the strike price is and you'll learn that $5.00 word

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from watching the stock options video right? so if she has 20,000 options after

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four years she's vested in two and then wants to leave with her owned shares

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well in the strike price is 25 cents a share well she'll have to write a check

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to the company of 25 cents times twenty thousand or five grand [woman wearing 20,000 options sign smiles]

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but then own the 20 thousand shares instead of own the twenty thousand

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options. if company goes public or is sold for say thirty bucks a share she

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sells 20 thousand times 30 bucks or six hundred grand in winnings. yeah nice work

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if you can get it. just think of all the fancy vests you could buy yourself with

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that kind of cash. yeah all right moving on. [woman wears gold vest]

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