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+910 Part VI: Measuring and Trading Volatility 
+BASIC TAX TREATMENT 
+Listed options that are exercised or assigned fall into a different category for tax pur­
+poses. The original premium of the option transaction is combined into the stock 
+transaction. There is no tax liability on this stock position until the stock position itself 
+is closed out. There are four different combinations of exercising or assigning puts or 
+calls. Table 41-1 summarizes the method of applying the option premium to the stock 
+cost or sale price. 
+Examples of how to treat these various transactions are given in the following 
+sections. In addition to examples explaining the basic tax treatment, some supple­
+mentary strategies are included as well. 
+CALL BUYER 
+If a call holder subsequently sells the call or allows it to expire worthless, he has a 
+capital gain or loss. For equity options, the holding period of the option determines 
+whether the gain or loss is long-term or short-term. As mentioned previously, a long­
+term gain would be possible if held for more than one year. For tax purposes, an 
+option that expires worthless is considered to have been sold at zero dollars on the 
+expiration date. 
+Example: An investor purchases an XYZ October 50 call for 5 points on July l. He 
+sells the call for 9 points on September 1. That is, he realizes a capital gain via a clos­
+ing transaction. His taxable gain would be computed as shown in Table 41-1, assum­
+ing that a $25 commission was paid on both the purchase and the sale. 
+TABLE 41-1. 
+Applying the option premium to the stock cost or sale price. 
+Action 
+Call buyer exercises 
+Put buyer exercises 
+Call writer assigned 
+Put writer assigned 
+Net proceeds of sale ($900 - $25) 
+Net cost ($500 + $25) 
+Short-term gain: 
+Tax Treatment 
+Add call premium to stock cost 
+Subtract put premium from stock sale price 
+Add call premium to stock sale price 
+Subtract put premium from stock cost 
+$875 
+-525 
+$350