What are puts and calls and how are they taxed?

Answer 1

Calls give the right to buy at a set price during the life of the contract, Put let you sell at a pre-set price. If IBM is trading at 100 but you think it will be at 125 in less that 3 months, you can buy a a 3 month Call option. A call with a 95 dollar strike price will be the most expensive because it's "In the Money" So its safe to say that it will cost more that 5. A 110 may be real cheap because its "Out of the money" so it may only cost a 1.50. If the stock goes to 115 and you exercise the option 110 option, then your cost basis is 1.50 plus 110 or 111.50. If you sell the IBM shares you bought with the option immediately at 115, then you pay SHORT-Term Cap Taxes on 3.50 profit. If you hold your IBM shares longer than a year, The Difference of sale price and 111.50 is Taxed LONG - term rate. Or if you sell the option before its exercised whatever gain will be at short-term, unless you held the option longer than a year, which most options never have lives longer than several months. In the case that The stock falls and you option expires worthless, then the amount lost buying the option can be used to offset other gains. If less than a year, then the loss offsets short-term gains, and in the rare case the option was more than a year, its a long-term loss.

Answer 2

Calls and puts are options. They provide the right, but not the obligation to either buy (with calls) or sell (with puts) a predetermined amount of stock at a particular time for a particular price.

So for example, two $65 AAPL Sep call contracts, provide the buyer the right to buy 200 shares of AAPL at $65 anytime before the 3rd Friday of Sep.

They are typically taxed 60/40 LT/ST (or vice versa), but can vary depending on what type of entity you are trading them in. I'd assume for argument sake that they're all short term in making your investment decisions.