Question

"A customer sells short 100 shares of ABC stock at $50 per share. The stock falls to $40, at which point the customer writes 1 ABC Sept 40 Put at $4. The stock falls to $30 and the put is exercised. The customer's cost basis upon exercise of the put is:"

Answer 1

$36

Step-by-step explanation:

First, you sold the stock short at $50, and then sold a put option and received $4 per stock. Since the strike price of the put option is $40, the basis of the stock will be $40 - $4 = $36. You had to purchase the stocks to cover your short sale, so your gain = $50 (proceeds from short sale) - $36 (net basis) = $14 per stock