Option exercise is the action of paying the strike price to convert vested stock options into actual shares of common stock. It triggers tax consequences that vary by option type (ISOs create an AMT adjustment but no regular income; NSOs create ordinary income on the bargain element), requiring the holder to plan for both the cash outlay and the tax liabilities that arise. It is the moment options become stock, and the timing and structure of exercise significantly affect the holder's eventual after-tax outcome.
The exercise mechanics and methods: