This column focuses on the latter. A non-qualified option gives you the right to buy a set number of shares of your employer's stock at a specific price, known as the grant price, during a specified period of time. Buying the shares at the grant price is known as exercising the option. Your profit is the difference between the grant price and the stock's market price when you exercise. Typically, you can't exercise right away and must wait until options are vested, which can take one to five years.
Options also have an expiration date.
If you don't exercise before then, your option is worthless. So you have to exercise somewhere between the option's vesting and expiration dates. Mass. But once you exercise your option, you'll be taxed on the difference between the grant price and the stock's market price, at your ordinary income tax rate. You might also owe Social Security taxes and state taxes on your gain. Many workers exercise their options, then immediately sell the stock, limiting taxes to the difference between the exercise price and the market value.