Quick Answer
For calls, breakeven is strike plus premium; for puts, strike minus premium, both long and short. Buyer and writer share the same breakeven, so one side's gain is the other's loss. When options expire, the buyer takes a capital loss and the writer a gain; on exercise, no option gain is recognized, since the premium folds into stock basis.
The whole unit on one sheet: profit and loss for every strategy, then the tax rule for each option outcome.
Profit and Loss Core Formulas
- Long call: max gain unlimited, max loss premium paid, breakeven strike + premium.
- Short call (naked): max gain premium received, max loss unlimited, breakeven strike + premium.
- Long put: max gain strike - premium, max loss premium paid, breakeven strike - premium.
- Short put (naked): max gain premium received, max loss strike - premium (stock only falls to zero, NOT unlimited), breakeven strike - premium.
- Debit spread: net premium paid = max loss; max gain = strike difference - net debit.
- Credit spread: net premium received = max gain; max loss = strike difference - net credit.
- Straddle: one strike; upside breakeven strike + total premiums, downside strike - total premiums.
- Combination (strangle): two strikes; upside call strike + total premiums, downside put strike - total premiums.
The One-Liners That Win Points
- Calls Add, Puts Subtract. Strike + premium for any call breakeven; strike - premium for any put, long or short.
- The buyer's breakeven equals the writer's breakeven on the same contract; one side's gain is the other's loss.
- Max gain and max loss on a spread always sum to the strike difference. Quick check: $10 strikes with a $7 max gain means a $3 max loss.
- Covered call caps upside (max gain = strike - stock cost + premium); breakeven = stock cost MINUS premium received.
- Protective put breakeven = stock cost PLUS premium paid; max loss is limited, max gain unlimited.
- Expiration: long option = capital loss of premium; short option = capital gain of premium.
- Exercise or assignment: no gain or loss on the option; the premium folds into stock cost basis or sale proceeds.
- Writers are ALWAYS short-term, even on Long-term Equity AnticiPation Securities (LEAPS) held for years.
Numbers to Lock In
| Item | Value |
|---|---|
| Call breakeven | Strike + premium |
| Put breakeven | Strike - premium |
| Standard listed option max expiration | approximately 9 months (gains almost always short-term) |
| LEAPS max expiration | up to 39 months |
| LEAPS long-term threshold (buyer only) | held more than 12 months |
| Non-equity 1256 contract split | 60% long-term / 40% short-term, regardless of holding period |
| 60/40 blended top rate | approximately 26.8% vs. 37% ordinary short-term |
| Broad-based index test | 10 or more underlying securities |
| Mark-to-market date | December 31 (open positions taxed as if sold) |
| 1256 loss carryback | up to 3 prior years (same contract type only) |
| Wash sale window | 30 days before, day of, 30 days after (61 days total) |
Memory Aid: Calls ADD, Puts SUBTRACT
- Calls ADD the premium to the strike price (breakeven and exercise basis), for both buyer and writer.
- Puts SUBTRACT the premium from the strike price, for both buyer and writer.
- Buying stock (call buyer, put writer) makes it a cost basis; selling stock (call writer, put buyer) makes it sale proceeds.
Top Gotchas
- A short put's max loss is NOT unlimited. The stock can only fall to zero; only the short call has truly unlimited loss.
- A long straddle is not profitable just because the stock moved. It must move beyond a breakeven and cover both premiums paid.
- Upon exercise, NO gain or loss is recognized on the option and the stock holding period begins fresh the day after; the option's holding period does not tack on.
- Writers of options ALWAYS have short-term gains or losses. Only a buyer holding LEAPS more than 12 months gets long-term treatment.
- Individual equity options do NOT qualify for 60/40 marked-to-market. Only broad-based index, foreign currency, and yield-based options do; narrow-based indexes and over-the-counter (OTC) options do not.
- Unrealized gains on December 31 ARE taxable for 1256 marked-to-market contracts; you cannot defer by holding across tax years, and losses can be carried BACK up to 3 years (regular losses only carry forward).
- Buying a call within 30 days of selling stock at a loss IS a wash sale. Options are substantially identical to the underlying; the disallowed loss adds to the replacement's cost basis. 1256 contracts are generally exempt.
- A married put suspends the stock holding period while the put is open, which can prevent long-term treatment; but a put bought on stock already held long-term has no holding-period effect.
One-Breath Recap
Calls add the premium to the strike and puts subtract it, buyer and writer share one breakeven, and a short put can only lose down to zero while a naked call loses without limit. Expired options give the buyer a loss and the writer a gain, exercise folds the premium into stock basis or proceeds with no option gain, and writers are always short-term. Broad-based index, currency, and yield-based options ride the 60/40 marked-to-market rule, escape most wash sales, and let losses carry back three years.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Options Taxation and Calculations unit for the complete lesson.