For investors interested in options, it can be difficult to know how to calculate the cost base of a position.
In this segment of Motley Fool Live first aired on May 7, Jim Gillies, analyst at Motley Fool Canada, and Ellen Bowman, editor and analyst at Fool.com, discuss two different ways of looking at the cost base.
Jim Gillies: There are different ways of thinking about it. Number 1, you can think of it as, if you do, for example, where you already own your Apple (NASDAQ: AAPL) shares and they are in a tax sheltered account, so we are not going to take unnecessary taxes, so you don’t really care about your average cost. Because if you’re like me, you’ve bought it a few times over the years, and they’ve gone up.
Ellen Bowman: Almost every time the portfolio advisers have told you yes.
Gillies: Exactly. You might think, well, my actual sale price is 145 plus 270, so it’s 147.70. In three months, with the share price at around 130, is it worth it? Would you sell a stock 13.6% more than what you paid today in three months? Well, it’s a really good quarter. Frankly, it’s a pretty good year. Yeah, that’s a pretty good rate of return in a year. For three months that’s cool, and especially if you do it in a tax-sheltered account where in theory you can just buy back your shares and don’t worry, if you let her go, which you probably wouldn’t. t, you would probably ride. But whatever. This is one way you can think of it. The other way you might think of it is that you came into a new one, so rather than Ellen, your current situation where you already own stock, you said, “You know what, I have $ 13,000 in cash. , and maybe I’ll try one of those covered calls. ”Maybe you’ve sold some other stuff or just saved every paycheck like we all want. Some of us are better than others and some of us are less good at it. No name mentioned. It’s good that I hinted at you to handle this for me.
Archer: [LAUGHTER] Yeah, you got an account on me for fun.
Gillies: Yeah, I have an account to do this for me. [LAUGHTER] [LAUGHTER] . That’s great. The other thing is you can say, “Okay, well, I’m going to come in and I’m going to buy the new shares, so I’m going to pay $ 13,000 to buy the new shares.” Along with buying the new part, I’m going to sell the 145. “In that case, you can almost turn your head and say,” Well, my base cost isn’t really $ 130, it’s $ 127.30 “because it’s 130 minus the 270, and then I would sell at 145 prospectively. Neither is fake, nor is it definitive duty.
Archer: I don’t think cost base is part of it, I like to do the math that way because it’s psychologically [LAUGHTER] makes you feel the smartest. More psychology in some of this stuff that I think we’d like to admit and that’s a way of saying, “Dude, I made a really good choice. I put the stuff on sale. Good for you. me.”
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