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Managing Cost Basis
Cost basis is the total amount you have invested in a position. For stock investors, cost basis is usually the purchase price of the shares. For options traders, the cost basis can change over time as premiums are collected or positions are adjusted. Understanding your current cost basis helps you evaluate your true profit, loss, and potential return.
What Changes Your Cost Basis?
Several events can affect your cost basis, including:
- Selling a cash-secured put.
- Being assigned shares.
- Selling covered calls.
- Buying back options.
- Rolling a position.
Each event changes the economics of the position. Rather than viewing each trade separately, many traders focus on how each action affects their overall cost basis.
Example:
Suppose you are assigned 100 shares at $20.00.
Your original investment is:
100 × $20.00 = $2,000
Before assignment, you collected $150 from selling the put.
Your effective cost basis becomes:
$2,000 − $150 = $1,850
Your adjusted cost basis is now:
$18.50 per share
If you later sell a covered call and collect another $75, your cost basis is reduced again:
$1,850 − $75 = $1,775
Your new cost basis becomes:
$17.75 per share
Every premium you collect is money that no longer has to come from your own pocket.
Why Cost Basis Matters
Many traders focus only on the current stock price. However, your actual investment may be very different because premiums have reduced your cost basis over time.
Knowing your adjusted cost basis can help you:
- Better understand your current position.
- Evaluate potential returns.
- Make more informed decisions when managing assigned shares.
- Compare future covered call opportunities.
OptionLogic in Practice
OptionLogic automatically tracks your position as premiums are collected, buybacks occur, and covered calls are sold.
Instead of manually calculating your adjusted cost basis after every transaction, the software continuously updates your position so you always know where you stand.
Frequently Asked Questions
What is cost basis?
Cost basis is the total amount invested in a position after considering purchases, premiums collected, and other adjustments.
Does selling a covered call reduce my cost basis?
Yes. The premium received from selling a covered call reduces the amount of your own capital invested in the position.
Does buying back an option affect cost basis?
Yes. Buying back an option reduces some of the premium previously received, increasing your effective cost basis.
Why is cost basis important?
Cost basis helps determine your true investment, current profit or loss, and the effect of future trades.
How does OptionLogic help?
OptionLogic automatically updates your cost basis as your position changes, helping you evaluate your current investment without performing manual calculations.
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