Series 4

AAA

Option Taxation And Margin Requirements - Exercising A Call

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.

Series 4 online exams

Exercising A Put
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