Stock Option

A stock option grants the right, but not the obligation, to purchase a fixed number of company shares at a set exercise price, also called a strike price, for a defined period, typically up to ten years from grant. The option has value to the holder only if the stock price rises above the exercise price before it expires. If the stock never clears that price, the option can expire worthless. Nothing obliges the holder to exercise it, which is what separates an option from a share the holder already owns.

This is the feature that distinguishes an option from a restricted stock unit. An RSU delivers value whenever it vests, at whatever the stock is worth then, while an option delivers value only on the upside above its strike price. That makes options a more explicitly performance-leveraged instrument: the same rise in the stock produces a larger percentage gain on a small option value than on a full share. It is also part of why options have become a smaller share of typical executive pay packages than RSUs and PSUs over the past decade.

The exercise price is set on the grant date and, for compliant awards, is generally the stock’s market price that day, which is why grants are described as at-the-money. Once set, the strike generally stays fixed: repricing a falling option downward requires a separate, shareholder-approved process and is far less common than it once was. An option that falls underwater as the stock declines therefore tends to stay underwater unless the company takes that additional step.

Because an option is a right rather than a share, its grant-date fair value cannot be read off the stock price directly. It is estimated with an options-pricing model, most often Black-Scholes or a binomial model, using the stock’s volatility, the option’s expected term, the dividend yield, and a risk-free rate. That modeled value appears in the Summary Compensation Table’s option awards column, and it is generally positive even for an at-the-money option, because the model captures the possibility of future upside rather than only the current spread.

Two tax categories of option are commonly granted to employees. A nonqualified stock option is taxed as ordinary income when it is exercised, on the spread between the exercise price and the market price. A statutory incentive stock option can receive different tax treatment if holding-period requirements are met, and is subject to an annual limit under the Internal Revenue Code. The distinction matters to the holder’s tax outcome but not to the size of the award, which is disclosed the same way either way.

Exercise itself is the step that converts the right into shares. A holder may pay the exercise price in cash, or use a cashless exercise through a broker who sells enough of the shares to cover the cost and delivers the rest. The exercise window after a holder leaves the company is often shorter than the option’s full term, so a departing holder may face a brief period to decide. Options that are not exercised within their stated term simply expire, regardless of whether they were ever profitable.

Options are disclosed in several places in the proxy. The Summary Compensation Table’s option awards column reports the grant-date fair value of options granted during the year. The Grants of Plan-Based Awards table ties each grant to a grant date, a share count, an exercise price, and that same fair value. The Outstanding Equity Awards at Fiscal Year-End table shows the options still outstanding, their exercise prices, and their expiration dates, which is where the difference between an option’s strike and the current stock price becomes visible.

Raghib Hussain holds unexercised Marvell stock options at a $12.12 exercise price, covering 72,976 shares still outstanding under the award.