Question

A customer, long 100 shares of ABC at 73, writes 1 ABC Apr 75 call at 2 to generate additional income. ABC stock subsequently moves higher at which time the customer is exercised. For tax purposes, which of the following statements are TRUE?

Cost basis is $73 per share.
Cost basis is $71 per share.
Sales proceeds are $75 per share.
Sales proceeds are $77 per share.

A) II and III.
B) I and IV.
C) II and IV.
D) I and III.

Answer 1

For tax purposes, the cost basis for the customer's ABC shares is $73 per share and the sales proceeds of their exercised call option are $75 per share.

Step-by-step explanation:

When the customer writes the ABC Apr 75 call for $2, they generate additional income. If the ABC stock subsequently moves higher and the customer is exercised, their cost basis remains the same at $73 per share.

Therefore, the correct statements for tax purposes are:

1. Cost basis is $73 per share.
2. Sales proceeds are $75 per share.

So, the correct option is (I and III).

L