Cashless stock option

A cashless stock option is an arrangement in which the holder of a stock option borrows enough cash from a stockbroker to exercise (pay for) the shares indicated in the option agreement, and then uses the proceeds from the exercise to pay back the broker. The broker arranges for the sale of the shares to a third party, collects the cash from the transaction, extracts its commission, and forwards the remaining funds to the former owner of the stock option. The individual therefore never needs to expend any personal funds to exercise the option.

Brokers agree to this arrangement because it is virtually certain that they will be repaid as soon as the underlying shares can be sold.

The ease of using a cashless stock option arrangement means that there is less of an incentive for individuals to continue to hold onto their stock options, which has tended to result in faster liquidations of option holdings.

This arrangement is also known as a cashless exercise.

Related Topics

Accounting for Stock-Based Compensation 
Human Resources Guidebook