Folks here are likely talking about employee stock options [NSOs and ISOs]. They've each got their pitfalls, but generally if you exercise them, you immediately owe tax [or AMT, depending--talk to an accountant first!] on the difference between your strike price and the current fair market value. If your employer's public, you know what that value is and can generally sell to cover your taxes. If your employer is private, you need to find out what the FMV is from your employer, and you still owe tax on it [if there's a gain], but you likely have no way of selling to pay the taxes.

Gotcha! That makes sense re: HN... Not sure why I assumed calls/puts, tbh.

They were employee stock options, not call/put ones. And yes, he had no idea he would owe tax on money he never had.

His tax bill was way more than his net worth.

I believe there were Illustra engineers who exercised options shortly after the Informix acquisition at the end of 1995 (at $36/share) but either couldn't immediately sell shares or choose not to thinking the stock value would go up. They owed taxes on their gains (about $30/share) but shortly thereafter the stock crashed leaving the shares worth less then the taxes owed. The stock only continued to decline in value after Informix restated earnings and the extent of their channel stuffing became known.

https://www.edn.com/toxic-accounting

https://en.wikipedia.org/wiki/Informix_Corporation#Phil_Whit...

That really sucks. I hope your friend is doing better now. :(