# How to Calculate Stock Basis for Exercised Options

i Jupiterimages/Photos.com/Getty Images

An option buyer has the right to buy or sell 100 stock shares for a preset price -- the strike price -- on or before expiration date. If the buyer exercises an option, she'll need to know the cost basis of the underlying shares so she'll be able to figure her gain or loss. The stock’s cost basis is the price she paid for the shares and the option, plus commissions.

A call option buyer benefits when the underlying stock price goes up. The value of a call is due to the excess of the stock price over the strike price, plus additional “time value” that represents the possibility that the stock price will increase before expiration. The buyer can exercise a call and receive shares at a discount below their current market price. For example, suppose you buy a call for a \$200 premium with a strike price of \$45 per share, and exercise it when the stock is selling for \$48 per share. Discount = 100 shares x (\$48 per share current price - \$45 per share strike price) = \$300. You could then immediately sell the 100 shares for \$48 each, or \$4,800 sale proceeds, locking in the \$300 discount. The cost basis is the strike price per share multiplied by the number of shares, to which you add the call premium and the commission. In this case, cost basis = (100 shares x \$45 per share + \$200 premium + \$7 commission) = \$4,707. The gain on the sale = \$4,800 sale proceeds - \$4,707 cost basis = \$93.

## Call Seller

The call seller collects a premium at the time of sale and must stand ready to deliver the underlying shares whenever the stock price exceeds the strike price. When this happens, the options exchange can “assign” the seller, who must then cough up the shares. The cost basis of the shares is whatever the seller shelled out for them. The seller might have purchased the shares before assignment. Otherwise, he’ll have to buy them after assignment. Profit is measured by adding the amount received for selling the shares to the call premium and subtracting the cost basis of the shares and commissions.