If an investor exercises a call option, the option’s premium is added to the investor’s cost base for the stock to determine any capital gain or capital loss. For tax purposes, the holding period for the stock begins when the call is exercised. If an investor wrote a call, the call option’s premium must be added to the option’s strike price to determine the investor’s proceeds on the sale of the stock if the stock is called away.

Example:

An investor buys 1 JKL September 60 call at 3 on Tuesday July 7th. If on Monday August 2nd, JKL is trading at 68 and the investor exercises the call, the investor’s holding period would begin on August 2nd not on July 7th when the investor purchased the call. The investor’s cost base for JKL after exercising the call is 63, the call’s strike price plus the premium.

An investor who sells 1 RTG May 40 call at 5 and has the stock called away from them will have an effective sale price for RTG of $45. Investors who sell calls and have the stock called away must add the call option’s premium to the strike price to determine the sale proceeds for tax purposes.

Need Help Passing Your Series 4 Exam?



Exercising A Put

Related Articles
  1. Trading

    Three Ways to Profit Using Call Options

    A brief overview of how to provide from using call options in your portfolio.
  2. Trading

    Going Long On Calls

    Learn how to buy calls and then sell or exercise them to earn a profit.
  3. Taxes

    Tax Treatment For Call & Put Options

    A brief intro to the complex US tax rules governing call and put options with examples of some common scenarios.
  4. Investing

    Writing Covered Calls On Dividend Stocks

    Writing covered calls on stocks that pay above-average dividends is a strategy that can be used to boost returns on a portfolio, but it carries some risk.
  5. Retirement

    Write Covered Calls To Increase Your IRA Income

    Covered calls may require more attention than bonds or mutual funds, but the payoffs can be worth the trouble.
  6. Trading

    The Basics Of Covered Calls

    Learn how this simple options contract can work for you, even when your stock isn't.
  7. Trading

    4 Reasons To Hold Onto An Option

    There are times when an investor shouldn't exercise an option. Find out when to hold and when to fold.
  8. Trading

    How To Manage A Bull Call Spread

    A bull call spread, also called a vertical spread, involves buying a call option at a specific strike price and simultaneously selling another call option at a higher strike price.
  9. Trading

    Trade The Covered Call - Without The Stock

    The standard covered call can be used to hedge positions or generate income. This calendar spread may do so more effectively.
  10. Trading

    Cut Down Option Risk With Covered Calls

    A good place to start with options is writing these contracts against shares you already own.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center