Generally, an employee stock option is a right that a company grants an individual to purchase a specific number of shares of its stock at a set price during a specified period.
Example: You receive a grant of 1,000 options with an exercise price equal to the market price on the date of grant. You will make money if the stock price goes up after grant. You have 10 years in which to exercise your options to obtain ownership of the 1,000 shares of stock. Review your stock plan document for details on exercise prices, vesting, exercise procedures, and the impact of termination on your stock grant.
Companies grant two kinds of stock options: nonqualified stock options (NQSOs), the most common type; and incentive stock options (ISOs), which offer tax benefits but also raise the risks of the alternative minimum tax (AMT).