The most common methods involve the use of the following:

The table below outlines the way in which each exercise method works.

Method Cash paid to exercise Cash received at exercise Shares used to exercise Shares received at exercise
Cash exercise Yes No No Yes
Cashless exercise No Yes Yes No
Sell-to-cover exercise No No Yes Yes
Stock swap No No Yes Yes
Promissory note No No No Yes
Net options exercise No No Sort of Yes

Check your company's stock plan for the allowed methods and procedures. Once you do give notice to exercise with payment as required under your stock plan, it is unlikely that you can then change your decision to exercise or the exercise method, at least for tax purposes. This is illustrated by the case of Walter v. Commissioner, decided by the US Tax Court (2007). The employee attempted to change his original exercise instructions from a same-day sale to a cash exercise/hold. The Tax Court did not let him, holding that he had beneficial ownership of the stock when he initially exercised the options following the conditions under his stock plan.

Alert: Companies strictly follow their exercise rules and deadlines, and courts tend to side with them. See, for example, Deal v. Consumer Programs, Inc. (2006), decided by the 8th Circuit Court of Appeals. The court ruled that the mere submission of a written notice to exercise stock options may be insufficient when the grant agreement states that the notice must be "accompanied by full payment of the purchase price of the shares."

For financial-planning ideas related to the methods and timing of option exercises, see the FAQs in the section Financial Planning: Strategies.