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.

Need Help Passing Your Series 4 Exam?

Protective Puts

Related Articles
  1. Trading

    Three Ways to Profit Using Put Options

    A brief overview of how to profit from using put options in your portfolio.
  2. Trading

    Introduction To Put Writing

    Learn about a strategy that may be appropriate if you have a positive outlook on a stock.
  3. Trading

    How to Sell Put Options to Benefit in Any Market

    As long as the underlying stocks are of companies you are happy to own, put selling can be a lucrative strategy.
  4. Trading

    When Should I Sell A Put Option Vs A Call Option?

    Beginning traders often ask not when they should buy options, but rather, when they should sell them.
  5. Trading

    What Is A Bull Put Spread?

    Investopedia explains: A bull put spread is a variation of the popular put writing strategy, in which an options investor writes a put on a stock to collect premium income and perhaps buy the ...
  6. Investing

    Long on Oil? Hedge Falling Oil Prices with Options

    With no end to the oil slump in sight, here are some risk management strategies using options to protect your oil positions.
  7. Trading

    What's the Strike Price?

    The strike price is the price at which a derivative can be exercised, and refers to the price of the derivative’s underlying asset. In a call option, the strike price is the price at which the ...
Frequently Asked Questions
  1. What is the difference between gross profit margin and net profit margin?

    Gross profit margin and net profit margin are two separate profitability ratios used to assess a company's financial stability ...
  2. What's The Formula For Calculating Free Cash Flow?

    Free cash flow is the cash left over after a company pays for its operating expenses and capital expenditures. High free ...
  3. What are soft dollars?

    The term 'soft dollars' refers to mutual funds making in-kind payments to their service providers; for instance, by passing ...
  4. What are Vanguard's Admiral Shares?

    Learn about Vanguard Admiral Shares – a separate class of shares for mutual funds – with lower fees and a higher required ...
Trading Center