Question

A customer sells short 100 shares of ABC stock at $74 per share. The stock falls to $66, at which point the customer writes 1 ABC Sept 65 Put at $3. The stock falls to $58 and the put is exercised. The customer's cost basis upon exercise of the put is:_________

Answer 1

Answer: $62

Explanation:

The customer sold the stock short at $74 per share. Later on, the customer sold a Sept 65, Put at $3 on this stock. If the short put is exercised, the customer is obligated to buy the stock at $65 per share. Since the customer received $3 in premiums when the put was sold, the net cost to the customer is $62 per share for the stock (this is the cost basis in the stock for tax purposes). The stock that has been purchased is delivered to cover the short sale, closing the transaction. The customer's gain is: $74 sale proceeds - $62 cost basis = 12 point gain.