If the preferred stock was issued, say, at a value of $5 a share, and your options have an exercise price of $1 per share vs. the fair market value of $2 per share, then you’ll likely owe taxes on your unfair benefit – which is the difference between $2 and $1. A seller of the stock option is called an option writer, where the seller is paid a premium from the contract purchased by the stock option buyer., warrants, and convertible securities, aside from just the basic shares outstanding. If a company plans to acquire another company, it will need to pay that company’s shareholders by paying at least the market capitalization value. The following shows how stock options are granted and exercised: ABC, Inc., hires employee John Smith. As part of his employment package, ABC grants John options to acquire 40,000 shares of ABC’s common stock at 25 cents per share (the fair market value of a share of ABC common stock at the time of grant).