What Is the Best Thing to Do with Stock Options? 5 Moves That Matter

Stock options can build serious wealth or become worthless paper. The difference often comes down to when you act and how you execute. Yet most employees leave money on the table because they never develop a real strategy.

This guide breaks down the five moves that actually matter when managing your equity compensation.

Here’s what we’ll cover:

Exercise and hold for long-term growth potential
Exercise and sell immediately to lock in gains
Exercise and sell to cover your costs while keeping shares
Spread exercises over time for smarter tax management
Know when to wait or let options expire

Your stock options have an expiration date. Your strategy shouldn’t be an afterthought. Let’s walk through each approach so you can make the right call for your situation.

Exercise and Hold for Long-Term Growth

This strategy is straightforward: buy your shares at the strike price and keep them. You’re betting the stock will appreciate over time, and you want to capture that upside.

The tax benefits can be significant. For ISOs, holding shares at least one year after exercise and two years after the grant date qualifies your gains for long-term capital gains rates instead of ordinary income.

Tax Rate Comparison

Tax Type	Rate Range (2025)
Long-term capital gains	0%, 15%, or 20%
Ordinary income	Up to 37%

When This Makes Sense

You believe strongly in your company’s future
You can afford the upfront cost without financial strain
You have a runway to meet holding period requirements
Your portfolio isn’t already overweight in company stock

The Risk

Your money is tied up in a single asset. If the stock drops below your strike price, you’ve paid for shares worth less than what you spent. For ISOs, you may also trigger Alternative Minimum Tax (AMT) at exercise, creating a tax bill before you’ve sold anything.

File an 83(b) election within 30 days if you’re early exercising unvested shares. This locks in the current value for tax purposes and starts your holding period clock immediately.

Exercise and Sell Immediately

Sometimes the smartest move is cashing out. You exercise your options and sell all the shares in a single transaction, pocketing the difference between the market price and the strike price.

This approach eliminates market risk entirely. You lock in a guaranteed profit and walk away with cash.

When This Makes Sense

The stock has appreciated significantly, and you want certainty
You need liquidity for a major purchase or financial goal
Your portfolio is too concentrated in company stock
You’re skeptical about the company’s future growth

Tax Reality by Option Type

Option Type	Tax Treatment
NSOs	Spread taxed as ordinary income at exercise; withholding applies immediately
ISOs (sold immediately)	“Disqualifying disposition” triggers ordinary income rates on the spread

The Trade-Off

Paying 37% on a guaranteed gain beats paying 15% on gains that evaporate because you held too long. Certainty has value.

Consider selling in a year when your other income is lower to reduce the overall tax bracket impact.

Exercise and Sell to Cover

This middle-ground approach lets you acquire shares without draining your bank account. You exercise your options and immediately sell just enough shares to cover the purchase price, taxes, and fees. The remaining shares stay in your account.

How It Works

Step	Action
1	Exercise all your vested options
2	Sell enough shares to cover strike price + taxes + fees
3	Keep the remaining shares in your account

Example Scenario

Options: 1,000 at $10 strike price
Current price: $50 per share
Exercise cost: $10,000
Shares sold to cover: ~250 (includes taxes/fees)
Shares retained: ~750

When This Makes Sense

You want equity exposure but lack cash for full exercise-and-hold
You believe in growth but want to de-risk slightly
Your employer’s plan allows cashless exercises

Important Limitations

Not all companies permit sell-to-cover transactions. Private companies without a liquid market typically don’t offer this option. Check your equity agreement before assuming this path is available.

Calculate your tax withholding carefully. Underpaying at exercise creates an unpleasant surprise at tax time.

Spread Exercises Over Time

Exercising all your options at once can push you into a higher tax bracket. A smarter approach: spread exercises across multiple years to keep taxable income in check.

This strategy works especially well for NSOs, where the spread gets taxed as ordinary income the moment you exercise.

Single Year vs. Multi-Year Exercise

Approach	Taxable Income	Likely Bracket
Exercise 10,000 NSOs at once	$500,000	37%
Exercise 2,500 NSOs per year (4 years)	$125,000/year	24%

Assumes $10 strike, $60 current price, $50 spread per share

When This Makes Sense

You have a large option grant with significant built-in gains
Your options have several years before expiration
You’re in or near a high tax bracket
You want to minimize AMT‘s impact on ISO exercises

For ISOs Specifically

Spreading exercises help manage AMT exposure. Large ISO exercises can trigger substantial AMT liability even though you haven’t sold shares or received cash.

Map out a multi-year exercise plan with a tax advisor. Factor in expected income changes, vesting schedules, and expiration dates.

Know When to Wait or Let Options Expire

Doing nothing is a valid strategy. If your options are underwater (stock price below strike price), exercising makes zero financial sense. You’d be paying more than market value for shares available cheaper on the open market.

Decision Framework

Situation	Recommended Action
Stock price below strike price	Wait or let expire
Company prospects uncertain	Wait for clarity
Approaching IPO or acquisition	Wait for liquidity event
Stock never recovered, options expiring	Let expire, move on

Critical Deadlines to Track

Standard expiration: 10 years from grant date
Post-termination window: Usually 90 days after leaving
ISO qualification: 3 months post-employment to maintain tax benefits

The Psychological Trap

People hold underwater options hoping for a turnaround that never comes. Set a personal decision point. If the stock hasn’t recovered by a certain date, mentally write off the options.

Set calendar reminders at 6 months, 3 months, and 30 days before expiration. Don’t let valuable options vanish because you forgot.

Make Smarter Stock Option Moves Today

Stock options are only valuable if you act on them strategically. The right move depends on your tax situation, risk tolerance, and belief in your company’s future. Now you have the framework to decide with confidence.

Key Takeaways:

Exercise and hold work best when you believe in long-term growth and can meet ISO holding requirements
Exercise and sell immediately locks in guaranteed gains and eliminates market risk
Sell-to-cover lets you acquire shares without out-of-pocket cash
Spreading exercises across years keeps you in lower tax brackets
Underwater options aren’t worth exercising, so track expiration dates carefully
The $100,000 ISO rule can convert excess options to less favorable NSO treatment
Work with a tax advisor to optimize timing and minimize liability

The best thing to do with stock options is to treat them as part of your broader financial plan. Whether you hold for growth, cash out for certainty, or spread exercises for tax efficiency, the key is making intentional decisions before deadlines force your hand.

FAQs

How to best use stock options?

The best way to use stock options depends on your financial goals and tax situation. Start by understanding whether you have ISOs or NSOs, since each has different tax treatment. Track your vesting schedule and expiration dates carefully.

Most importantly, avoid concentrating too much wealth in a single company. A balanced approach typically involves exercising strategically over time, considering tax implications, and diversifying your gains into other investments.

What is the 7% rule in stocks?

The 7% rule is a risk management guideline that suggests selling a stock when it drops 7-8% below your purchase price. Popularized by investor William O’Neil, this rule helps limit losses before they become catastrophic.

For stock option holders who have exercised and hold shares, applying a similar stop-loss mentality can protect gains from evaporating during market downturns.

What is the $100,000 rule for stock options?

The $100,000 rule is an IRS limitation stating that no more than $100,000 worth of Incentive Stock Options (ISOs) can vest in any single calendar year. The value is calculated using the stock’s fair market value on the grant date.

Any ISOs exceeding this threshold automatically convert to Non-Qualified Stock Options (NSOs), losing their favorable tax treatment and getting taxed as ordinary income upon exercise.

What is the best stock option strategy?

The best stock option strategy combines tax efficiency, risk management, and alignment with your financial goals. This typically means spreading exercises across multiple years to manage tax brackets, understanding the difference between ISO and NSO treatment, avoiding over-concentration in company stock, and planning for liquidity needs. Work with a tax advisor to create a multi-year exercise plan that accounts for vesting schedules, expiration dates, and your expected income changes