Options Taxation and Calculations: Rapid Fire
Chapters in this video
- 0:00 Calls add, puts subtract: the unbreakable rule
- 1:12 Short put max loss is not unlimited
- 2:21 Covered call and protective put breakevens
- 3:47 Spread max gain and max loss cheat code
- 4:28 Expiration versus exercise tax treatment
- 5:35 Writers always short-term, even on LEAPS
- 6:00 1256 contracts: 60/40 split and mark-to-market
- 8:10 Rapid-fire exam recap
What this video covers
- Why calls add the premium to the strike and puts subtract it, and how this single rule covers every breakeven for both buyers and writers
- How a short put's max loss is capped at strike minus premium (not unlimited), while only the short call carries truly unlimited risk
- The covered call breakeven formula (stock cost minus premium received) and the protective put breakeven (stock cost plus premium paid)
- Why max gain plus max loss on any spread always equals the strike difference, and how to use this as a quick math check
- Tax treatment at expiration (buyer takes capital loss, writer takes capital gain) versus exercise (no option gain or loss recognized, premium folds into stock basis)
- Why option writers are always short-term, even on multi-year Long-term Equity AnticiPation Securities (LEAPS), and why only buyers holding LEAPS over 12 months get long-term treatment
- The 60/40 split, mark-to-market on December 31, and three-year carryback that apply to 1256 contracts (broad-based indexes, foreign currency, and yield-based options)
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