Add training workflow, datasets, and runbook
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914 Part VI: Measuring and Trading Volatility
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purchased (the day after the call was exercised). The option's holding period has no
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bearing on the stock position that resulted from the exercise.
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Example: An XYZ October 50 call was bought for 5 points on July 1. The stock had
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risen by October expiration, and the call holder decided to exercise the call on
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October 20th. The option commission was $25 and the stock commission was $85.
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The cost basis for the stock would be computed as follows:
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Buy 1 00 XYZ at 50 via exercise
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($5,000 plus $85 commission)
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Original call cost ($500 plus $25)
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Total tax basis of stock
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Holding period of stock begins on October 21.
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$5,085
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525
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$5,610
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When this stock is eventually sold, it will be a gain or a loss, depending on the stock's
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sale price as compared to the tax basis of $5,610 for the stock. Furthermore, it will
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be a short-term transaction unless the stock is held until October 21st of the follow
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ing year.
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CALL ASSIGNMENT
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If a written call is not closed out, but is instead assigned, the call's net sale proceeds
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are added to the sale proceeds of the underlying stock. The call's holding period is
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lost, and the stock position is considered to have been sold on the date of the assign
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ment.
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Example: A naked writer sells an XYZ July 30 call for 3 points, and is later assigned
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rather than buying back the option when it was in-the-money near expiration. The
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stock commission is $75. His net sale proceeds for the stock would be computed as
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follows:
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Net call sale proceeds ($300 - $25)
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Net stock proceeds from assignment
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of 100 shares at 30 ($3,000 - $75)
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Net stock sale proceeds
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$ 275
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2,925
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$3,200
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In the case in which the investor writes a naked, or uncovered, call, he sells
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stock short upon assignment. He may, of course, cover the short sale by purchasing
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stock in the open market for delivery. Such a short sale of stock is governed by the
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