TradeLog implements the IRS rules for Exercising/Assigning option securities. The adjustments vary depending on the type of option and whether the trader is the writer or the holder of that option. When handled properly, there is no recorded profit or loss generated for the option. Only the stock’s cost basis or sales proceed is adjusted.
The following example will be used for practical demonstration in these instructions:
Our trader shorted 10 ACI JUL09 15.5 PUT option contracts for $1,334.49. Several days later the option was exercised and 1000 shares of ACI were delivered to the account at $15,500. This means our trader will have to reduce the basis in the stock bought by the amount received for the PUT. In other words the PUT option's proceeds ($1,334.49) will be subtracted from the basis of the stock, (at $15,500).
To adjust for the exercised option and assignment:
Use theFind, Tickercommand to find all stock and option trades related to this security, if you are not already viewing them. Make sure to use the * wildcard character to find both stocks and options which start with the same stock ticker symbol. (i.e.: DELL* will find both DELL stock trades as well as DELL option trades.)
Select the option transaction as well as the corresponding assigned stock transaction with your mouse. Holding the CTRL key on your keyboard while left-clicking with your mouse allows you to select non-adjacent records.
Select Exercise / Assign from the dropdown TradeLog Edit menu, or click Ctrl + E for the keyboard shortcut.
You will be prompted if you want to Exercise the selected option transactions and adjust the cost basis or sales price of the stock transaction, Is this what you want to do? - click Yes.
You will next be prompted to save your records, click Yes to continue.
The TradeLog Matched Lots column will display "Ex-N" where N is the Exercise/Assignment number. This number starts with 1 and increments each time you exercise an option.
Repeat the above steps for each exercised option / stock assignment combination.
You can easily find all of your exercised and assigned positions by using menu item: Find, Exercises / Assigns.
In our trader’s case the ACI PUT option is now closed and zeroed out and the ACI stock received now amounts to $14,165.51.The difference is $1334.49.
Four IRS rules to Learn:
As mentioned before the adjustment to the stock depends heavily on the option and acquisition type. We note this point in this guide, so that users can see how TradeLog properly accounts for different types of option trades.
(1) As shown above, if our trader is a writer of a PUT option that is exercised, then the option’s proceeds will be subtracted from the basis of the stock.
(2) If our trader buys a PUT option, they are constituted as a holder of that option. This means we have to reduce the proceeds in the stock we sold by the cost of the put. - For example, 2 MER OCT09 13.5 PUT option contracts were exercised by the company. The amount of the option at $122.44 was exchanged for 200 shares of MER at $2,700 that were sold. The sale of the stock has to be reduced from $2700 to $2,577.56. The difference is $122.44.
(3) IRS rules apply to call options as well. If our trader writes a CALL option, the option's proceeds will be added to the sale of the stock. - Consider closely if 1 TSO NOV09 13 CALL option is shorted for $98.29. If exercised, 100 shares would show as sold at $1,300. The stock sale will have to be increased by $98.29 for a total of $1398.29.
(4) On the other hand if our trader is the holder of a CALL option then the cost of the CALL option gets added to the basis of the stock. - So if 1 TSO Jan10 16.5 CALL option was exercised at $108, then we would receive 100 shares at $1650. When adjusted, the cost basis for the stock will read $1,758.
Learning these 4 rules, and taking note to what options are exercised will save time and will provide accurate data for taxes.