What Are Stock Options? And Do You Want Them?

On Jan. 1, 2004, X Corp. grants Rachel, an employee of the company, an ISO under which she can purchase 100 shares of X stock at $10 per share over a 10-year period. On July 10, 2004, when the fair market value of X stock is $20 per share, Rachel exercises the option to purchase all 100 shares by paying $1,000 for stock that has a fair market value at the time of $2,000. Rachel recognizes no income tax consequences upon the grant or exercise of the ISO.