When to Exercise Stock Options: A 2026 Decision Framework

You've worked hard, your stock options have value, and now you're facing one of the most consequential financial decisions of your career: when should you exercise?

There's no single right answer — the optimal timing depends on the type of options you hold (ISOs vs. NQSOs), your tax situation, the company's outlook, your personal financial goals, and market conditions. But there is a structured way to think through the decision.

This 2026 guide provides a practical framework for deciding when to exercise your stock options, including updated tax considerations, diversification principles, and real-world scenarios.

Before You Start: Know What You Have

Before making any exercise decisions, make sure you understand the basics of your grant:

Option type: ISOs or NQSOs? The tax treatment is very different. Read our ISO vs. NQSO guide for a detailed comparison.
Exercise (strike) price: The price you'll pay per share when you exercise
Current fair market value (FMV): What the shares are worth today (for public companies, this is the stock price; for private companies, it's typically the latest 409A valuation)
Spread: The difference between FMV and your exercise price — this is your paper gain
Vesting schedule: How many options are currently exercisable
Expiration date: When your options expire and become worthless if unexercised (typically 10 years from grant, or 90 days after leaving the company)
Post-termination exercise period: How long you have to exercise after leaving the company (often just 90 days for ISOs)

The Five Key Factors in Your Exercise Decision

Factor 1: Tax Impact

Taxes are usually the single biggest variable in your exercise decision. The type of options you hold determines the tax treatment:

For ISOs:

No regular income tax at exercise, but the spread may trigger Alternative Minimum Tax (AMT)
If you hold shares for 1+ year after exercise and 2+ years after grant, gains are taxed at long-term capital gains rates (0%, 15%, or 20% + 3.8% NIIT in 2026)
Strategy: Exercise incrementally across tax years to manage AMT exposure. In 2026, the AMT exemption is approximately $85,700 (single) / $133,300 (married filing jointly)

For NQSOs:

The spread at exercise is taxed as ordinary income immediately (up to 37% federal + state taxes in 2026)
Additional appreciation after exercise is taxed as capital gains
Strategy: Exercise in years when your other income is lower to minimize your marginal tax rate

Key 2026 tax considerations:

Federal income tax brackets remain at 10%, 12%, 22%, 24%, 32%, 35%, and 37%
The SALT deduction cap of $10,000 still applies, relevant for high-earners in states like California (up to 13.3% state tax) and New York (up to 10.9%)
Net Investment Income Tax of 3.8% applies to investment income for AGI above $200,000 (single) / $250,000 (married)

Factor 2: Company Outlook and Stock Price

Your view on the company's future matters, but it shouldn't be the only factor:

If the stock is at an all-time high: Consider exercising and selling some shares to lock in gains. No one ever went broke taking profits.
If you believe significant growth is ahead: You might exercise and hold (for ISOs, to start the capital gains holding period clock). But be honest about whether your optimism is based on insider knowledge or hope.
If the company is pre-IPO: Exercising early (especially ISOs) can start your capital gains clock before a potential price increase. But you're also taking the risk of paying to exercise options in a company that may not succeed.
If the stock has declined below your exercise price: Your options are "underwater" and have no intrinsic value. There's nothing to do except wait for recovery or expiration.

Important principle: Don't let the tax tail wag the investment dog. If you would never buy the stock at its current price with cash, you probably shouldn't be holding it just because exercising would trigger taxes.

Factor 3: Concentration Risk and Diversification

This is the factor most people underweight — and it's arguably the most important.

If your stock options represent a large portion of your net worth, you have concentrated risk in a single company. This is the same company that provides your salary, your health insurance, and potentially your career trajectory. If something goes wrong, you could lose your income AND your savings simultaneously.

Guidelines for managing concentration:

Keep no more than 10–20% of your investable net worth in any single stock (including your employer)
If your options put you above this threshold, develop a systematic plan to exercise, sell, and diversify over time
Consider setting automatic triggers: "I'll sell 25% of my vested options whenever the stock reaches $X"

Remember: Enron employees, Lehman Brothers employees, and employees of countless other companies learned this lesson the hard way. Diversification isn't pessimism — it's prudent risk management.

Factor 4: Expiration and Post-Termination Deadlines

Options don't last forever. Key deadlines to watch:

Option expiration: Most options expire 10 years from the grant date. As expiration approaches, exercising becomes increasingly urgent.
Post-termination exercise period: If you leave your company (voluntarily or otherwise), you typically have only 90 days to exercise vested ISOs before they expire. Some companies offer extended post-termination exercise periods (1–10 years), but this is still the exception.
ISO-to-NQSO conversion: If you leave and your ISOs convert to NQSOs after 90 days, the tax treatment changes significantly. Plan ahead.

2026 tip: If you're considering a job change, review your stock option agreements first. The 90-day post-termination window for ISOs has caught many people off guard, forcing them to either forgo valuable options or come up with significant cash for exercise and taxes.

Factor 5: Life Events and Financial Goals

Your personal financial situation should drive timing decisions:

Home purchase: If you need funds for a down payment, exercising and selling some options may be the right move. Just factor in the tax bill so you don't come up short.
Starting a family: Increased expenses may warrant converting some options to cash or diversified investments.
Retirement planning: As retirement approaches, shifting from concentrated stock options to a diversified portfolio reduces risk during the critical years before and after retirement.
Debt payoff: High-interest debt (credit cards, variable-rate loans) may justify exercising and selling options to eliminate the interest burden.
Job transition: If you're leaving your company, the post-termination exercise deadline becomes the dominant factor.

A Practical Decision Framework

Here's a step-by-step framework for deciding when to exercise:

Calculate the spread and potential tax bill for each batch of vested options
Check your concentration: What percentage of your net worth is in company stock (including unvested options and RSUs)?
Model the tax scenarios: What would you owe if you exercise now vs. next year vs. in 3 years? For ISOs, include AMT calculations.
Set target prices: At what stock price would you want to lock in gains? Write these down and commit to them.
Create a schedule: Rather than one big exercise, consider a systematic plan (e.g., exercise 25% of vested options each quarter, or exercise whenever the stock exceeds $X).
Keep cash reserves: If you plan to exercise and hold, make sure you have cash available to cover the tax bill. For NQSOs, supplemental withholding at 22% may not be enough if you're in a higher bracket.

Common Mistakes to Avoid

Waiting too long: Options that expire worthless are the most common — and most avoidable — stock option mistake.
Exercising without tax planning: A large exercise without advance planning can result in paying thousands more in taxes than necessary.
Ignoring concentration risk: "The stock always goes up" is not a diversification strategy.
Making emotional decisions: Don't exercise (or refuse to exercise) based on loyalty to the company, fear of missing out, or reluctance to pay taxes. Make decisions based on your financial plan.
Not considering the 90-day window: If you leave your job, you may lose unexercised options within 90 days. Plan before you resign.

When to Get Professional Help

Stock option exercise decisions are one of the highest-ROI areas for financial advisor involvement. Consider working with an advisor if:

Your total option spread exceeds $100,000
You're unsure about AMT implications
You need to coordinate option exercises with other tax events (RSU vesting, property sales, business income)
You're approaching a job transition or IPO
You want a multi-year exercise plan that optimizes for taxes and diversification

A good advisor who specializes in equity compensation can often save you multiples of their fee in tax optimization alone.

Conclusion

Deciding when to exercise stock options is a complex decision with significant financial consequences. By considering tax implications, concentration risk, company outlook, deadlines, and your personal financial goals, you can make informed decisions that maximize the value of your equity compensation.

The worst decision is usually no decision — options that expire unexercised represent lost wealth that can never be recovered. Start planning now, even if you decide to wait.

Need help with stock option planning? Find a financial advisor on AdvisorFinder who specializes in equity compensation and can help you create an optimal exercise strategy.