How Do You Calculate Stock Basis For Exercised Options?
It is important to know how to calculate stock basis for exercised options in order to be able to determine the amount of profit or loss generated on a given trade. Basis is the technical term for an investor’s ultimate cost in a stock. For example, when an investor buys a share of stock for $10, his basis in that stock is $10. If he then sells someone an option to buy the stock from him for $12.50 and he collects an option premium of $1, that $1 he collected lowers his overall cost in the stock to $9 per share. Receive notification from your brokerage that an option has been exercised. This will most likely come in the form of a trade confirmation the day after option expiration. If an option is “In-The-Money” by even one cent, the option will be exercised. Determine your initial cost in the stock. This will be the share price you paid to buy the stock for the first time. Adjust your cost basis by calculating the total option premiums you have collected against the stock. Keep in mind
