Chapter 41: Taxes 921 
Suppose he does this on July 20th, the day he receives the assignment notice on his 
XYZ July 50 call. The confirmation that he receives from his broker for the sale of 
100 XYZ at 50 - that is, the confirmation for the call assignment - should be marked 
"Versus Purchase July 20th." The year of the sale date should be noted on the con­
firmation as well. This long-term holder of XYZ stock must, of course, pay for the 
additional XYZ bought in the open market for delivery against the assignment notice. 
Thus, it is imperative that such an investor have a reserve of funds that he can fall 
back on if he thinks that he must ever implement this sort of strategy to avoid the tax 
consequences of selling his low-cost-basis stock. 
PUT EXERCISE 
If the put holder does not choose to liquidate the option in the listed market, but 
instead exercises the put - thereby selling stock at the striking price - the net cost of 
the put is subtracted from the net sale proceeds of the underlying stock. 
Example: Assume an XYZ April 45 put was bought for 2 points. XYZ had declined in 
price below 45 by April expiration, and the put holder decides to exercise his in-the­
money put rather than sell it in the option market. The commission on the stock sale 
is $85, so the net sale proceeds for the underlying stock would be: 
Sale of 100 XYZ at 45 strike ($4,500 - $85) 
Net cost of put ($200 + 25) 
Net sale proceeds on stock for tax purposes: 
$4,415 
- 225 
$4,190 
If the stock sale represents a new position - that is, the investor has shorted the 
underlying stock - it will eventually be a short-term gain or loss, according to pres­
ent tax rules governing short sales. If the put holder already owns the underlying 
stock and is using the put exercise as a means of selling that stock, his gain or loss on 
the stock transaction is computed, for tax purposes, by subtracting his original net 
stock cost from the sale proceeds as determined above. 
PUT ASSIGNMENT 
If a written put is assigned, stock is bought at the striking price. The net cost of this 
purchased stock is reduced by the amount of the original put premium received. 
Example: If one initially sold an XYZ July 40 put for 4 points, and it was assigned, 
the net cost of the stock would be determined as follows, assuming a $75 commission 
charge on the stock purchase: