Share options give you the right to buy (or to sell) shares in a given company at a previously set price regardless of the current market price.
If, for example, shares in company A are trading at 75p, but you have options that allow you to buy 10,000 shares at a price of 25p (this is known as the ‘strike price’), you could buy the shares, sell them immediately (this is referred to as ‘exercising’ your options), and make £5,000 profit.
Firms often issue options to employees in an effort to create incentives that align the interests of employees and shareholders. But employees should not accept options in lieu of salary without being aware of the very high risks attached to them.
If the market price of the employer’s shares falls below the strike price of your options before they can be exercised (the “vesting date”), they are effectively worthless. When this happens, the options are referred to as being ‘underwater’.