Employee options are not the same instrument as exchange-traded options. They are issued by the company, last up to ten years, vest over time, and when exercised the company creates new stock rather than a counterparty delivering existing stock. That makes them a source of dilution.
Options priced far below the current market are sometimes called in the money, using the same language as a call-option. Underwater grants often get repriced, which is disclosed and dilutive in its own way.
Example: 6M options at a $12 strike with the stock at $40. On exercise the company receives $72M and issues 6M shares worth $240M. Existing holders of 150M shares are diluted by about 3.8%.
Related: stock-based-compensation, fully-diluted-shares, call-option