912 
Net sale proceeds ($300 - $25) 
Net cost ($100 + $25) 
Short-term gain: 
Part VI: Measuring and Trading Volatility 
$275 
-125 
$150 
If the investor had not bought the call back, but had been fortunate enough to be 
able to allow it to expire worthless, his gain for tax purposes would have been the 
entire $275, representing his net sale proceeds. The purchase cost is considered to 
be zero for an option that expires worthless. 
PUT WRITER 
The tax treatment of written puts is quite similar to that of written calls. If the put is 
bought back in the open market or is allowed to expire worthless, the transaction is 
a short-term capital item. 
Example: An investor writes an XYZ July 40 put for 4 points, and later buys it back 
for 2 points after a rally by the underlying stock. The commissions were $25 on each 
option trade, so the tax situation would be: 
Net put sale price ($400 - $25) 
Net put cost ($100 + $25) 
Short-term gain: 
$375 
-125 
$250 
If the put were allowed to expire worthless, the investor would have a net gain of 
$375, and this gain would be short-term. 
THE 60/40 RULE 
As mentioned earlier, nonequity option positions and future positions must be 
marked to market at the end of the tax year and taxes paid on both the unrealized and 
realized gains and losses. This same rule applies to futures positions. The tax rate on 
these gains and losses is lower than the equity options rate. Regardless of the actual 
holding period of the positions, one treats 60% of his tax liability as long-term and 
40% as short-term. This ruling means that even gains made from extremely short­
term activity such as day-trading can qualify partially as long-term gains. 
Since 1986, long-term and short-term capital gains rates have been equal. If 
long-term rates should drop, then the rule would again be more meaningful. 
Example: A trader in nonequity options has made three trades during the tax year. 
It is now the end of the tax year and he must compute his taxes. First, he bought S&P