Stock Options: From Theory to Real Market Benefit

Imagine your company offers you shares at €3 when the market values them at €6. That is exactly what happens with stock options, a compensation mechanism that originated in Silicon Valley during the 90s and now generates millions in profits for savvy employees worldwide.

The core: what are stock options really

Stock options are rights to purchase shares of your company at a fixed (strike) price set in advance. It’s not an obligation—it’s your choice to exercise them or let them expire. Unlike traditional stock options that require paying a premium, stock options come free in your contract.

Four elements define this instrument:

• Strike: fixed purchase price (for example, €3)
• Volume: maximum number of shares (1,000, 5,000, etc.)
• Term: execution window (typically 3-5 years)
• Premium: zero—this is the advantage over normal stock options

Why startups and tech companies bet on stock options

High-growth companies need to motivate their teams without draining cash. A startup expecting to multiply its value 10x has clear incentives: giving away small portions as compensation attracts talent without immediate costs.

In Spain, the recent Startup Law has legitimized this model, allowing young companies to retain key employees through this instrument. Established firms with slow growth (such as distributors or retail) rarely use stock options because their shares don’t skyrocket.

How to make money with stock options: three scenarios

###In The Money(ITM) Your strike is below the market price. If you bought at €4 and the share is worth €6, you have +€2 of implicit profit per share. Exercising here makes sense.

###At The Money(ATM) Strike and market price match (rare in practice). Your intrinsic value is zero, with no gains or losses at that moment.

###Out of The Money(OTM) Your strike exceeds the market price. If you bought at €5 and the share is worth €3, you let the option expire. You don’t exercise because you would amplify losses.

Stock options vs. stock options: the key difference

Stock options: only for linked employees, no premium, identical functionality to stock options.

Stock options: any investor can buy them by paying a premium, but they get exactly the same benefit mechanism. It’s like renting the same car: the employee gets the gift of using it for free; the investor pays for that right.

All stock options are Call (rights to buy), never Put.

Practical case: when to and when not to

Exercise the option if:

• The company is publicly traded or achieves a significantly higher valuation
• The strike is substantially below the actual price
• My time horizon allows waiting without liquidity pressure

Let the option expire if:

• The company fails or stagnates
• The market price falls below the strike
• The expiration date approaches without a bullish outlook

Tax implications in Spain (2023)

Once you exercise and sell:

• Capital gain of €0-6,000 → 19% tax
• €6,000-50,000 → 21%
• €50,000-200,000 → 23%
• €200,000-300,000 → 27%
• Above €300,000 → 28%

The brackets are progressive. If you earn €10,000, the first €6,000 is taxed at 19% (€1,140) and the remaining €4,000 at 21% (€840), paying a total of €1,980. Your net gain: €8,020.

Real benefits vs. latent risks

In your favor:

• Gains without a cap (depend only on how much the company grows)
• Incentive alignment: you want the company to prosper
• Zero premium cost
• No impact on company liquidity

Against:

• No guarantee of profitability
• If the share drops, you lose the opportunity (even if no cash is lost)
• All gains are taxed, reducing the final return
• Psychological risk: holding onto the job longer to avoid losing the option

Stock options and futures: they are not the same

Futures obligate you to exercise. Stock options give you the choice. With futures, exchanging assets or differences is mandatory; with options, you decide whether to participate.

Investment strategies in stock options (for external investors)

If you want to play with stock options in the open market (not employee stock options):

Bullish strategy: Buy Call if you believe it will rise. If the share goes up, your profitability grows unlimited.

Bearish strategy: Buy Put if you anticipate a decline. Profit even if the market crashes.

Both require paying a premium, unlike the free stock options granted in the contract.

Conclusion: the silent wealth-building tool

Stock options are instruments of real value creation when three factors align: a company with growth potential, a competitive strike, and your ability to wait. It’s not exotic investing—simple math: buy low, sell high, without paying a premium.

For startup and tech employees, stock options represent a concrete opportunity to multiply wealth. For external investors interested in similar dynamics, stock options offer access to the same mechanism, with the only difference: the entry cost.