J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

30.11 Puts and Calls and Index Options

You may buy options to buy and sell stock. On the stock exchange, these options are named calls and puts. A call gives you the right to require the seller of the option to sell you stock during the option period at a fixed price, called the exercise or strike price. A put gives you the right to require the seller of the option to buy stock you own at a fixed price during the option period. See the chart on the preceding page for an explanation of different option terms.

The option price depends on the value of the stock, the length of the option period, the volatility of the stock, and the demand and supply for options for the particular stock.

Puts may be treated as short sales. Be careful in using puts when you own stock covered by the put. If you have held the stock short term, the purchase of the put is a short sale. The exercise or expiration of the put will then be treated as the closing of the short sale. Short-sale rules, however, do not apply (1) when you hold stock long term, and (2) when you buy a put and the related stock on the same day and identify the stock with the put (30.5).

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Planning Reminder

Speculate With Puts and Calls

Puts and calls allow you to speculate at the expense of a small investment—a call, for expected price rises, and a put, for expected price declines. They may also be used to protect ...