Series 4

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


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