FINRA Series 7 – General Securities Representative — Question 8

In June, Bubba bought 100 shares of XYZ at $35. In November, he bought a listed put in XYZ with a $35 strike price and a July expiration for a premium of $600.
In April, Bubba exercises the put option and uses his stock for delivery.
What is his resulting tax consequence?

Answer options

• A. a $600 capital loss
• B. neither profit nor loss
• C. cannot be determined without knowing the market price of XYZ upon exercise
• D. this is a wash sale and cannot be included in the investor’s tax calculations

Correct answer: A

Explanation

The correct answer is A because Bubba incurred a $600 capital loss from the premium paid for the put option when he exercised it without a sale of the stock at a profit. The other options are incorrect as he did experience a loss, and the market price at the time of exercise does not change the fact that the premium is a capital loss.