Series 7 practice questionhardOptions — Tax Treatment of Puts
An investor who buys stock and simultaneously buys a protective put exercises the put. How is the premium treated?
- AAdded to the cost basis of new shares purchased
- BSubtracted from the sale proceeds of the stock✓ Correct answer
- CRecognized as a separate capital loss
- DAdded to the sale proceeds of the stock
Explanation
Why B — Subtracted from the sale proceeds of the stock
When a put is exercised, the premium paid is subtracted from the proceeds received from selling the stock at the strike price. For example, if the strike is $50 and the put premium was $3, the net proceeds are $47 per share. This reduces the overall gain or increases the loss on the stock sale.
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