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You wrote, So if I understand correctly, if I recieve premiums for selling a put and the put expires without being exercised this is taxed as if it is a profit from a short term capital gain? On the other hand if the put is exercised then the premium is subtracted from the stock purchase to lower your basis?

I don't really know. (It's that novice thing kicking in again.) It sounds plausible. But I was under the impression that any sale is a taxable event. That means if you sell a put, you have to recognize the income immediately, wash rules not withstanding. You don't get the option of applying it to the basis of the associated security.

Covered calls would be similar. I think you have to recognize the premium as income up front, then if they're exercised you treat it as a normal sale.

Now if you bought a married put and it was exercised, then maybe you could use the premium you paid to increase your original cost basis. In any case, deferred recognition of the expense would only be beneficial because of the lower tax rate. But most options traded have a relatively short expiration.

Anyone else have anything to say?

- Joel
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