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