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