What to Know Before Clicking “Exercise” – Options When Exercising Your Options

October 9, 2025 | By Jessica Goedtel, CFP®

You’re finally ready for it – exercising your stock options. You’ve done your research, you’re happy with the price, and you’re hyped up to get it done. Whether you’ve got ISOs or NSOs, there’s a few extra decisions you’ll need to make when you hit the exercise button.

Let’s walk through your different exercise options so you know exactly what to do on game day.

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What is a Cash Exercise?

Also called “cash to cover,” it’s where you provide the cash to purchase the shares you want to exercise. You pony up the cash, the shares are purchased at the strike price (or exercise price) and they are yours.

If you’re exercising non-qualified stock options (NSOs or NQSOs), you’ll also need to put aside the funds for taxes. When you exercise NSOs, you get taxed on the difference between the strike price and the current value of the stock. Don’t panic – your custodian will help you calculate the tax withholding. Just keep in mind that depending on your tax bracket, you may need to pay more when you file your taxes.

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What does Sell-To-Cover mean?

This is an alternative to the cash exercise. If you don’t have the cash to buy the shares, you can sell some of your shares instead. When you choose this method, you start by picking how many shares you want to exercise. Your plan custodian will then calculate how many shares you’ll need to sell to cover the exercise costs, taxes, and commissions.

Once you click exercise, you’re all set. The custodian will handle the whole transaction, including selling the shares to raise the cash.

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What’s a Cashless Exercise?

A cashless exercise is the option you pick if you don’t want to keep any stock, you just want the money. You don’t put any cash out, hence the name. It’s also called a “same-day sale.”

With this option, when you click the exercise button, your plan custodian will exercise and sell all the shares in one swoop. They take out the cost for the exercise, including taxes, commissions, and the cost to buy the shares. You get the remainder in cash.

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Exercise Confirmation Breakdown

Once you’ve completed your exercise, you’ll get an exercise confirmation. Keep this for your tax records! Here’s a breakdown of some items it’ll include:

·         Number of shares you exercised in total, and the type of shares (NSOs, ISOs).

·         Order Type – cash exercise, cashless, sell-to-cover.

·         Fair Market Value/Exercise Market Value – the stock price when you exercised.

·         Grant price – the price you pay for the stock, set by your grant agreement (also called strike price).

·         Shares sold – what was sold to cover the cost of the exercise if you chose a cashless or sell-to cover exercise.

·         Taxes withheld – Federal, Social Security, Medicare, and state/local taxes withheld from the exercise (with cashless and sell-to-cover transactions).

·         Commissions – the fee, if any, charged by the custodian for the transaction. Usually it’s only a few dollars.

·         Net proceeds – how much you’ll receive if you did a cashless exercise.

If the terminology looks different at your stock plan custodian, don’t worry. For reasons that still elude me, every custodian uses different terms when talking about stock plans.

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Which Option Should I Pick?

It depends on what your goal is with your exercise. Each one has its pros and cons.

·         Cashless exercise – a great option if you’re happy with the stock price and just want to cash out.

·         Sell-to-cover – choose this if you want to buy some company stock, but don’t have the cash to buy the shares and pay the taxes.

·         Cash exercise – perfect choice if you have extra cash lying around and want to buy the stock. This maximizes how many shares you can purchase.

Stock options have lots of moving pieces. If you need a little extra help putting the puzzle together, schedule an introductory call with me today. I help tech workers turn their stock compensation into financial independence.