Qualifying Disposition

Categories: Tax

To be a real biker, you have to seem kind of mean. You can be a teddy bear on the inside, but on the outside, you have to look ready to throw down. In short, you have to have a qualifying disposition to be a biker.

This kind of qualifying disposition has to do stock options. (About as far from biker fights as you can get.)

There are a couple of popular programs used to distribute stock-based incentives for employees, such as incentive stock options (ISO) or employee stock purchase plans (ESPP). The qualifying disposition happens when the stock is sold, or otherwise gotten rid of. The employee extracts some value from the stock option. That event triggers a tax liability. The employee must pay based on the capital gains tax rate.

The event (the sale or exchange or transfer) is known as the qualifying disposition.

Related or Semi-related Video

Finance: What are stock options in 90 se...0 Views

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Finance allah shmoop what are stock options in ninety seconds

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or less Here's a stock ibm not the tech company

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This one makes an anti constipation drug It's trading at

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one hundred eighty bucks a share Okay so here's an

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option of buy a share of ibm anytime in roughly

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the next three months For one hundred ninety dollars a

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share it's called a call option If you really believe

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the ibm will go to say two hundred dollars a

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share in the next three months well you'd be what's

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called ten dollars in the money then or then have

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a stock option or call option with a strike price

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of one hundred ninety dollars which would then have intrinsic

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value of ten bucks a share On the other end

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of the buy sell desk is the gal willing to

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sell you that call option for three bucks Three bucks

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a premium So gut check time Would you pay three

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dollars for the right to buy a share if ibm

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for ten dollars higher than where the stock's trading now

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today Meaning that to break even in the next three

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months the stock has to trade all the way up

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from one hundred eighty dollars a share to one hundred

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ninety three dollars a share jobs for you to get

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your money back but it goes to two hundred two

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share Well if you sell that option you'll have invested

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three bucks a share for a net return of seven

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bucks in just three months or less And yes we're

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ignoring commissions and taxes here because well in problems like

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this or just a in the book but three dollars

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into seven only three months Yeah that's a great score

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You'd have more than doubled your money And on an

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annualized return basis that's over a nine hundred percent dish

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return really good score but with a much more likely

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case that you spend three bucks to buy the option

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and it expires totally worthless And then you've lost your

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entire investment in that option So that's a call option

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It's evil twin is a put option So whereas a

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call options the rightto by a security to set price

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by a certain set date a put option is the

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right to sell that option We'd go into more detail

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here but we're promised ninety seconds

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