Selling Puts & Assignment

[Tintin]

I'm a bit confused, and it would be nice to have a real step by step scenario.

============================================
Under: How to Handle Selling Puts

<snip> There are three possibilities on how the position will get closed:

[3rd scenario] If the shares are put to you, record a purchase in the put investment at $0/share, as well as a purchase in the underlying stock's investment at the option price.
============================================

Could you please detail the action, bearing in mind that there already is a position in the underlying that was bought through normal purchase, including the file management of the option and the newly assigned equity. Also if only partial assignment occured over time. TIA for the forthcoming clarification.

[Mark]

Hi Tintin,

Just for reference, we are talking about the instructions shown here:

http://www.fundmanagersoftware.com/sellput.html

This scenario involves 2 investments, one for the put, and one for the underlying investment. For example:

Investment 1:
Symbol: NQPI.X
Description: INTC Apr 2009 9.0000 put

Investment 2:
Symbol: INTC
Description: Intel Corporation

When you sell the put, record a sell in Investment 1 at whatever price you received when you sold them.

If the position gets closed with scenario 3, record a purchase in Investment 1 at a price of $0/share. Also record a buy in Investment 2 at whatever price you sold your puts for originally.

Each investment is its own file, as is always the case with investments.

If only partial assignment occurred over time, just record the above 2 transactions (purchase in Investment 1, buy in Investment 2) for the number of shares that were assigned to you.

[Tintin]

I'm trying to figure out how to handle the assignment of the gain from selling the put.

Say I sold a JAN $120 Put, and got $10 for the option, and get assigned.
Even thought I'm paying $120 per share, my tax basis is $110, since I got the $10 initially when I sold the Put option. Hence the option is not reportable in the year it expired, but rather, lowers the basis of my assigned stock purchase.

I want to see the options in my report, but not see a gain. Maybe I need to buy back the options at the price I initially paid for them (proportionally if assigned on different dates), and mentally carry that portion to my stock purchase with a note. What would be the best way to show that I paid $120 per share, but enter an off setting $10 to reduce my basis?

I'm trying to figure out how to see this in reports, and Schedule D reporting in an elegant manner. Thanks for the quick response.

Have I got this right???

Needless to tell you that this year I got a lot of assignments , all during November and December... Ummmm wonder why

[Mark]

Hi Tintin,

For your example, you can do this:

Method 1:
Record a purchase in the option for $10, such that you have a gain of 0.
Record a purchase in the stock for $120.
Record a 'Return of Capital' distribution in the stock for $10.

The 'Return of Capital' in the stock will reduce your cost basis to the desired $110. The net result in your default cash account is also correct.

Here is an alternative way to record this:

Method 2:
Transfer Out (a negative share amount) from the option.
Transfer In the shares of the stock you were assigned. Specify the cost basis as $110 and the market value as $120.
Record a sell in your cash account for $120 to pay for the stock.

Both methods end up the same. One difference is with method 1, you will see a line item in your capital gains report, but the gain will be 0. In method 2, you won't even see this line item. If your broker puts the proceeds from the sale of the put on your 1099, you may prefer to use method 1, so your total sell proceeds match the 1099.

[Tintin]

Argggg.. OK, here is my issue, if I use the "return of capital", which is fine, I cannot assign this return to a specific option assignement.

Thus - I SOLD (not bought) a PUT option, got cash in my account for the sale. Then I got assigned at the PUT's strike price. I need to lower the basis of that specific assignment (aka purchase), so that I can handle the sale of the specific lot once it matures into long term.

OR! even lower the basis of that specific lot if I later sell CALL options against it. Worse, if I sell 20 calls (equal to 2000 shares) but these calls if & when assigned, will be allocated to different purchased lots. This I usually tell my broker upon the assignment. When I sell the the CALLS, I do not assign them to a specific lot until assignment, if they expire worthless I just take a short term capital gain.

In my real life scenario, I have a large amount of shares which I acquired via PUTS and sold via CALLS ... and for tax reporting, I tell my broker which lots to sell at the time of the assignment or outright sale.

I fear I may near a block diagram on this one, as it may not be built into FM.

All hints welcome.... <g> AND I'm only a poor individual investor! With 3 accounts, - Regular, IRA and Keogh ! but many trades...

Tintin

[Mark]

Hi Tintin,

The 2 methods I described above are what to do when the PUTs get assigned to you. The recording of the initial sale of the PUTs is recorded as well in both cases. The whole transaction series would look like this:

Code: Select all

- Sell investment PUT_Stock for $10
- When the PUTs get assigned to you, then do either of the 2 methods previously described (example with Method 1):
  > Record a purchase in PUT_Stock for $10, such that you have a gain of 0.
  > Record a purchase in a separate Stock investment for $120.
  > Record a 'Return of Capital' distribution in the Stock investment for $10.


I believe this satisfies all the requirements. Your cash ends up correct, and the gain of your PUT option is $0, and the cost basis of your stock is $110.