Option Taxation And Margin Requirements - Closing An Option Position

Executing an order to close an option position will result in a capital gain or capital loss if the closing price differs from the opening price.

Example:

An investor buys 5 TRY August 40 calls at 4. If TRY increases in price to 47 and the investor sells the calls at 9, the investor will have a $2,500 capital gain. The investor paid 4 for the calls and sold them at 9 resulting in a $5 per share profit on 500 shares. Alternatively, if TRY fell to 41 and the investor closes out the position by selling the calls at 1, the investor would have a $1,500 capital loss. The investor would have lost $3 per share on 500 shares.

An investor who sells 2 ABC July 60 puts at 7 and covers the position with a closing purchase by buying back the puts at 2 will have a $1,000 capital gain. The investor made $5 per share on 200 shares. Alternatively, if ABC fell in price and the investor covered the short puts with a closing purchase by buying back the puts at 11, the investor would have an $800 loss. The investor lost $4 per share on 200 shares.

Series 4 Prep - Securities Institute

Exercising A Call


Related Articles
  1. Professionals

    TAXATION OF OPTIONS

    Taxation of Options An investor who purchases a call or put that expires worthless will have a short-term capital loss. An investor who purchases long-term LEAPS (Long Term Equity Anticipation ...
  2. Options & Futures

    Prices Plunging? Buy A Put!

    Investors can make money on a falling stock by going long on a put.
  3. Professionals

    Short Stock Long Calls

    An investor who sells stock short believes that they can profit from a fall in the stock price by selling it high and repurchasing it cheaper. An investor who has sold stock short is subject ...
  4. Professionals

    Long Stock Short Calls / Covered Calls

    An investor who is long stock can receive some partial downside protection and generate some additional income by selling calls against the stock they own. The investor will receive downside ...
  5. Professionals

    SHORT STOCK LONG CALLS

    Short Stock Long Calls An investor who sells stock short believes that they can profit from a fall in the stock price by selling it high and repurchasing it cheaper. An investor who has sold ...
  6. Options & Futures

    Prices Plunging? Buy A Put!

    You can make money on a falling stock. Find out how going long on a put can lead to profits.
  7. Professionals

    Short Stock Short Puts

    An investor who has sold stock short can receive some protection and generate premium income by selling puts against their short stock position. Selling puts against a short stock position will ...
  8. Professionals

    LONG STOCK SHORT CALLS/COVERED CALLS

    Long Stock Short Calls / Covered Calls An investor who is long stock can receive some partial downside protection and generate some additional income by selling calls against the stock they own. ...
  9. Professionals

    SHORT STOCK SHORT PUTS

    Short Stock Short Puts An investor who has sold stock short can receive some protection and generate premium income by selling puts against their short stock position. Selling puts against a ...
  10. Options & Futures

    The Basics Of Covered Calls

    Learn how this simple options contract can work for you, even when your stock isn't.
RELATED TERMS
  1. Put

    An option contract giving the owner the right, but not the obligation, ...
  2. Share Capital

    Funds raised by issuing shares in return for cash or other considerations. ...
  3. Buy To Cover

    A buy order made on a stock or other listed security that closes ...
  4. 2% Rule

    A trading practice where an investor should concentrate no more ...
  5. Average Up

    The process of buying additional shares at higher prices. This ...
  6. Short Sale

    A market transaction in which an investor sells borrowed securities ...
RELATED FAQS
  1. What's the smallest number of shares I can buy?

    Unlike mutual funds, which can be purchased in fractional units, shares of stock cannot be divided. So, the smallest number ... Read Answer >>
  2. How risky is a covered call?

    Learn what a covered call strategy is, how investors use it, and the risk of a covered call strategy and how it offers limited ... Read Answer >>
  3. What's the difference between a long and short position in the market?

    Understand long and short positions for stocks and option contracts; combine long and short positions for added leverage ... Read Answer >>
  4. Is it more advantageous to purchase a call or put option?

    Learn the advantages of put and call options to choose the right side of the contract to meet your personal investment objectives. Read Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    Find out about the difference between subscribed share capital and issued share capital, including an explanation of the ... Read Answer >>
  6. What types of capital are not considered share capital?

    Find out what types of capital are not considered share capital, including an explanation of the different types of share ... Read Answer >>
Hot Definitions
  1. Goodwill

    An account that can be found in the assets portion of a company's balance sheet. Goodwill can often arise when one company ...
  2. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  4. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  5. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  6. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
Trading Center