long 1 zzz jan 55 put @ $11 when market price = $47. Several months later, market goes to $54 and the option is closed at intrinsic value. What is the tax consequence?
My question is, why was the option sold at $100? The investor paid $1100 for the option. $55-54?
The investor “purchased” the put for (-$1,100). In order to close at intrinsic value you have to do the opposite of of that so we would have to “sell” 1 contract at $1 ($55-$54) which is (+$100).
Which makes the debit balance (-$100), no? $1100 out to purchase the put, $1000 in to sell the contract. $100 out (debit). As am writing this… Plus the $100 gain on the short contract (to intrinsic value) to $54. And intrinsic value is breakeven? Thanks for clarifications…
Let’s start from the beginning.
First, the investor buys the option for $11 ($1,110).
Later, the market goes to $54. The option is a put with a strike price of $55, which means the holder can sell ZZZ at $55 regardless of the market price. With a market price of $54, this option has $55-$54=$1 ($100) of intrinsic value. When the investor closes this option at intrinsic value, they sell it for $100.
Putting both legs together, the investor paid $1,100 to buy, and then received $100 when they sold, so they paid a net total of $1,000. This means they have a $1,000 loss.
This makes sense. Maybe you could just finally clarify what closing the option at intrinsic value actually means/looks like. I’m fairly certain it is where the contract is making money, I.e. the option is making money when the market is at $54. Thank you again.
Yes, that’s right: intrinsic value is the amount the option is worth based on the strike price and the current market price. Closing the position just means making the opposite of the initial trade, so the position no longer exists.