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Option Exercise / Assign

 
Exercising and Assigning Options
 
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.
 
Notes:
  • Some options qualify as Section 1256 contracts (such as broad-based index options and some ETF options). IRS Publication 550 page 61 says "Gain or loss is recognized on the exercise of an option on a section 1256 contract." Therefore, the Exercise/Assign function simply closes the option at zero price and does not make any adjustments to the corresponding stock trade.
  • Broad-Based Index Options that are cash settled need to be handled differently and require manual adjustment - see our blog article entitled: Reporting the Exercise of Cash Settled Section 1256 Contracts in TradeLog
     
Common cash settled Index options include:
SPX
UTY
OEX
XAU
NDX
BKX
DJX
HGX
OSX
EPX
RUT
SOX
 
 
To adjust for the exercised option and assignment:
 
  • Click All Trades then Edit, Exercise/Assign


     
  • TradeLog will discover and display the options that need assigning at the bottom of the screen.
     
    The first option in the list will already be selected, you can hit the Enter key on your keyboard, or click the Exercise button on the bottom right panel to begin adjusting.
     
    If you have multiple options to exercise, TradeLog will prompt you to first attempt to automatically exercise as many as possible - or you can choose to manually exercise each position.
     
    TradeLog will calculate and make the necessary adjustments and then move to the next position in the list.
     
     
  • To permanently skip a stock from being included in the list of assignments, select a stock record from the upper grid and click the Skip button. The stock will be marked as Ex-0 in the Matched column and will no longer be included when trying to exercise options.


     
  • Repeat the steps above until you have completed all of your assignments.
     
  • Some positions may require you to manually select both a stock and an option record. A yellow box will appear in the lower right corner of the screen alerting you to select the corresponding stock and option records in the upper grid.
     

     
  • When at least one stock and one option record has been selected, the Exercise button will be enabled allowing you to complete the exercise. You may select multiple stock and option records if needed.


     
  • When all options have been exercised TradeLog will automatically move to the next step. Alternatively, you can click the Close button to stop at any time and save the adjustments already made.
     
     
  • TradeLog will now display the finished adjustments in the grid. If the assignment was done correctly there will be an "Ex- X" in the matched tax lots column.
     
     
  • TradeLog will prompt you to save the records. Click Yes.
     
 
 
Note: In its preliminary setup, this function searches for stocks and options that share the same underlying security and fixed or exercise price. In some cases, due to improper broker adjustments, trades may be imported with the wrong exercise price. Users must edit the trade(s) to show the proper price before using this function.
 
Also, it is highly recommended that active day traders verify that the options exercised in TradeLog match their broker's statement record. Some trades that share the same exercise price are merely coincidences of active trading.

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. There are four IRS rules that dictate how an option is adjusted - see our Tax Topic on Option Expiration and Stock Assignment.
 
Learning these 4 rules, and taking note to what options are exercised will save time and will provide accurate data for taxes.