5. Option Taxation And Margin Requirements

An investor who exercises a put must subtract the put’s premium from the option’s strike price to determine their proceeds from the sale. A put writer who is exercising a put must subtract the premium from the strike price to determine their cost base for the stock. An investor who is short a put and who is assigned the stock will subtract the premium received from the strike price to determine their cost base for tax purposes.

Example:

An investor purchases 1 CVB October 70 put at 3. If CVB falls to 60 and the investor purchases the stock and exercises the put, the investor will have a \$700 capital gain. The investor purchased the stock at 60 and subtracts the premium paid for the put from the strike price to determine the sale proceeds. In this case 70 – 3 = 67.

An investor who sells 1 KLM November 80 put at 9 and who is assigned the stock will have a cost base for the stock of 71.

Protective Puts

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