Question

1. Susan sells a put to Peter on 6/1/20 and Susan agrees to purchase up to 1,000 shares of Microsoft stock from Peter at $90 per share anytime on or before 11/1/20. Peter had purchased the shares 9 months earlier for $100 per share. Microsoft is selling for $100 per share on 6/1/20. Peter pays Susan $10,000 for writing the put. The stock never falls below $95 per share and the put lapses without being exercised. How do Susan and Peter treat the writing of the put and its later lapse?
2. Same as except the price of Microsoft falls to $85 and Peter exercises the put. Susan agrees to pay Peter $5 per share ($5,000) to settle the put.

Identify if the gain is short term or long term.

Answer 1

Ans:

1.

Date of option wrinting : 6/1/2020

Put Premium : $10,000

Strike Price : $90

Current stock Price: $100

At the time of writing put, Peter will pay Susan $10,000 as premium on option. As the price never goes below strike price, Option Lapses. No transaction will occur between them in such case.

So Susan will Treat $10,000 as income and Peter will treat $10,000 as loss on put option. Also it will be treated as short term gain because period covered is less than 12 months.

2.

If at the time of Expiry Price become $85, Susan will pay Peter $5 to settle the payment. In such case Susan will book a profit of $10,000 - $5,000 = $5,000 and Peter will book a loss of $5,000 (Put premium - settlement amount).

The gain will be treated as short term gain because period covered is less than 12 months.

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