Overview of Stock Options

1. What is an option to acquire common stock?
An option is the right to purchase common stock for a fixed price for a specified term. 100 options to acquire United common stock represents the right to buy 100 shares of common stock of United. United is the “grantor” of an option and each Flight Attendant is a “grantee” of an option. The grantee of an option is not obligated to buy the stock; the option holder has the “option” to purchase the stock. An option is granted pursuant to an agreement that specifies the number of shares you have the option to purchase, the exercise price, the expiration date, the vesting schedule and other terms and conditions. These concepts are explained in the questions that follow.

2. What is the exercise price of an option?
The exercise price is the price per share at which an option holder has the right to buy common stock of the grantor of the option. The exercise price is sometimes referred to as the “strike” price. An option to acquire 100 shares of common stock of United at an exercise price of $10.00 per share means that the holder of that option has the right to buy 100 shares of common stock of United at $10.00 per share.

3. What is the expiration date of an option?
The expiration date is the date on which the option is no longer exercisable. An option that is granted on January 1, 2002 for a period of 10 years will expire on December 31, 2012.

4. What does the term “vesting” mean?
“Vesting” means that an option to acquire common stock is exercisable by a holder. Until an option has “vested” it is not exercisable by a holder and the stock underlying the option cannot be purchased by the option holder. Options often are not exercisable immediately when they are granted but only on and after a specified later date or upon the occurrence of a specified event. Typically the right to exercise options vest over a period of time by being spread over a number of specified dates. For example, options may vest at a rate of 33% per year, meaning that a holder could exercise 33% of the options in year one, 66% in year two, and all of the options in year three and thereafter. An option to acquire 100 shares of common stock of United at an exercise price of $10.00 per share that has not vested cannot be exercised by the holder. An option to acquire 100 shares of common stock of United at an exercise price of $10.00 per share that is 50% vested can be exercised by the holder as to 50 of the 100 options. The remaining 50 shares cannot be exercised until the vesting date has passed.

5. How do options work?
Once an option vests the holder can exercise his or her right to buy shares at the exercise price. A Flight Attendant would pay the exercise price to United and in return would receive the common stock. The Flight Attendant can keep the stock or sell it, but will have to pay taxes of some sort on the difference between the market value of the stock he or she receives and the exercise price paid. The arrangements proposed by United would not require a Flight Attendant to advance any cash in order to exercise an option.

6. How is an option valued?
The value of an option is based upon the market price of the common stock that it represents the right to acquire. The value of an option will fluctuate as the market price of the common stock that it represents the right to acquire fluctuates. For instance, if a Flight Attendant holds an option to acquire 100 shares of common stock of United at an exercise price of $10.00 per share and the market price of the common stock of United is $20.00 on a specific date, the option has a value on that date of $10.00 per share and a total value (before taxes) of $1,000. The $10.00 per share represents the value of one share of common stock of United ($20.00) MINUS the exercise price of the option ($10.00). The $1,000 amount represents the value of 100 shares of common stock of United ($2,000) MINUS the exercise price of the option to acquire the 100 shares of common stock of United ($1,000). Conversely, if a Flight Attendant holds an option to acquire 100 shares of common stock of United at an exercise price of $10.00 per share and the market price of the common stock of United is $5.00 on a specific date, the option has no value on that date.

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