How to Calculate Gains and Losses on Exercised Options (2024)

When a call options holder exercises her option by purchasing the underlying shares, she must add the cost of those shares to the premium she paid to obtain the option in the first place. This sum represents the option holder’s total money spent as a result of her options transaction. If the option holder then elects to sell the underlying securities she’s just purchased at their current market price, the money she receives from the sale will be money she takes in. To calculate her gain or loss, subtract the money she paid out from the money she took in. It’s as simple as that.

So, if, for instance, Marie paid $200 in premiums to purchase a call option with a strike price of $20 and then exercised the option by purchasing 100 shares of the underlying stock,themoney she spent as a result of her options transaction will be $2,200($200 premium paid + $2,000 purchase price for underlying securities). If she then sells those 100 sharesat themarket price of $25, she will receive $2,500 in sales proceeds. Subtracting the money she spent from the amount she received will result in a $300 gain ($2,500 sale proceeds – $2,000 purchase price – $200 premium paid = $300 gain.)

In order for a put options holder to exercise his option, he must have 100 shares of the underlying security to sell to the options seller. That means he needs to go out in the market and purchase shares at theirmarketprice. The money he pays for those securitiesplus the premium he paid to purchase his put option in the first place representsmoney spent as a result of his options transaction. The options holder will then sell those 100 shares to the options seller at the strike price. When he does this, he receives the sale proceeds. Subtracting the money spenton the putfrom the sale proceeds will result in theputinvestor’s gain or loss.  

So, if, for instance,Pierrepaid $300 in premiums to purchase aputoption with a strike price of $30 and thenpurchases100 shares of the underlying stockwhen its market pricedropsto$25, he will have spent $2,800 as a result of his options transaction ($300 premium + $2,500 purchase pricefor underlying shares). He will then sell those 100 shares to the options seller at their strike price of $30 and take in $3,000 from his sale. Thus, Pierre will make a total of $200 on his options transaction ($3,000 sale proceeds - $300 premium – $2,500 purchase price = $200 gain).

Now let’s look at gains or losses from the perspective of an options seller. Remember that when someone sells an option, he receives the premium from the options buyer. If the option expires unexercised, the seller gets to keep his entire premium received, which represents his maximum potential gain. If the option is exercised, he will either be required to sell shares of the underlying security to the option holder in the case of a call option or buy shares from the option holder in the case of a put option. Each of an exercised call or an exercised put option transaction is made at the option’s strike price.

When a call option is exercised, the option seller must obtain 100 shares of the underlying stock to sell to the options holder. To do so, he will have to purchase thesharesat theircurrentmarket price, whichwill behigher than the option’s strike price. He will then sell them to the option holder at the strike price. The money he takes in from the sale is added to the premiums he received when shorting the option, and this totals the money he takes inas partof his options transaction. The money he paid to obtain the underlying securities is the money he pays out. Subtracting the money he pays out from the money he takes in results in his overall gain or loss.

For example, let’s say Michaelsells a call option with a strike price of $50 andreceives premiums totaling $500.Ifthe optionisexercised, and Mike purchases the underlying shares at $55, hewill have paid out $5,500 as a result ofhisoptions transaction. At the same time,hewill have received $5,500 ($500 premium + $5,000 strike price). Thus,Mikewill break even onthistransaction; money taken in will be equal to money paid out.

When a put option is exercised, the option seller must purchase 100 shares of the underlying security from the options holder at the strike price. This represents money the options seller pays out. The options holder has already received the premium when she sold the option, and after purchasing the 100 shares, she can sell them for their current market price. The combination of the seller’s sale proceeds and the premium received represents money taken in. Subtracting money paid out from money taken in will result in the investor’s gain or loss. 

Let’s sayMaribelshorts a put option and receives premiums totaling $400. The option has a strike price of $40, and the option holder exercises it when the underlying stock is trading at $35. This meansMaribelis obligated to pay $4,000 total for the 100 underlying shares. This is moneyshe pays out. Shehas already taken in $400, and ifshe chooses to sell the underlying stock at its current market price,she will take in an additional $3,500 in sales proceeds. This meansshewill receivea total of $3,900 from his options transaction ($3,500 sale proceeds +$400 premium) and paid out a total of $4,000. As a result,she has lost $100 on his options transaction ($3,900 money in – $4,000 money out = -$100).

As long as you understand what is occurring when an option is exercised, calculating gains and losses is as simple as comparingthemoney the investor takes into themoney she pays out.Calculating gains and losses on exercisedoptionsrequiresan understanding of the transaction and some simplemath. Follow the guidance above and you willbe ableto correctly answerthistype ofquestionon yoursecurities licensingexam.

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