A type of exercise whereby one can bypass the need to use one’s own money to buy a stock underlying a warrant. In other words, it constitutes the right to exercise an option or warrant without paying the cash exercise price. This is usually done by returning a specific number of options or warrants for their value (this value is determined by subtracting the exercise price from the stock’s market price).

The option is surrendered without separate payment of the exercise price and the employee receives the company’s stock with a market value equal to the spread in the option, i.e., netting the option exercise price against the market value of the shares covered by the option. For example, if an employee has one hundred options exercisable at $10 each, and the stock’s market price is $20, the employee could surrender 50 options as the exercise price for the other 50 options.

In real life, this involves a broker lending the option holder the money, purchasing the shares for him, and immediately selling them, for a given fee.

Cashless exercise can be subdivided into cashless exercise for cash and cashless exercise for stock (sell to cover).