Adjusted cost basis for covered calls, step by step

Premium-adjusted basis is your share cost, lowered by the option premium you have kept in the current cycle. Why that number, and not one of the other things people call “cost basis”, is in Covered-call cost basis after a roll. This guide is the method: five steps you can follow for any covered-call position, each shown on the demo roll.

The demo position, on a made-up ticker, DEMO: 300 shares bought at 21.50. A call at 22.00 sold for 0.60, then bought back at 0.10. A new call at 23.00 sold for 0.80, still open.

Step 1: Count the shares you hold now

Add up every share you hold in this position today. In the demo, 300.

Step 2: Find the raw basis

The raw basis is what you paid per share, the share cost your broker records. If you bought in more than one lot, it is the average cost of the shares you hold. In the demo, 6,450 for 300 shares: 21.50.

Options never move the raw basis. Buying or selling shares does.

Step 3: Sort this cycle’s option legs into settled and open

A leg is settled once it has been bought back, has expired, or has been assigned or called away. Every other leg is open.

In the demo, the 22.00 call is settled: it was bought back. The 23.00 call is open.

Step 4: Add up the settled P&L

For each settled leg, take the credit you received, less what it cost to close, less its option fees. Leave the open legs out.

In the demo: 180 − 30 = 150. The open call’s 240 is left out: it can still be lost.

Step 5: Spread it over your shares and subtract

Divide the settled P&L by the shares from step 1, and subtract that from the raw basis.

In the demo: 150 ÷ 300 = 0.50 a share, and 21.50 − 0.50 = 21.00. That is the premium-adjusted basis.

What changes a step

• Fees. Option fees come off the settled P&L in step 4. The demo has none, to keep the arithmetic clear.
• More shares. Buying more changes the raw basis in step 2, and step 5 divides by the new share count.
• A call on part of your shares. If only part of the shares is called away, that call’s settled premium leaves with the shares it covered. It never lowers the basis of shares the call did not cover.
• The end of a cycle. When all the shares leave, the cycle is complete. A later purchase starts a new cycle at step 1, without the old premium.
• Tax. This is not your tax basis. Only your tax rules, and whoever prepares your taxes, define that.

Keep it in a sheet

The sheet below lays out the five steps as lines, with the demo roll in one column and how each line is worked out in the next.

In yourfinance

The Positions view shows the raw basis and the premium-adjusted basis side by side for each position, and moves the adjusted figure only when a leg settles. You record the events; the five steps are done for you.