A type of stock option grant that meets certain tax requirements and in doing so confers favorable tax treatment on the optionholder. ISOs are free from regular tax at the date of grant and the date of exercise (when a nonqualified option would become taxable). If two holding periods are met (two years between the grant date and the sale date and one year between the exercise date and sale date), the profit on the ISO qualifies as a long-term capital gain rather than ordinary income. If the holding periods are not met, a disqualifying disposition occurs.

For details, see this website's section on ISOs.