Concentrated single asset positions

[prodigal]

Hello all,
This is regarding 2015 Schweser Book 1 Page 342 Answer 2.
Why should the cost of the put increase the tax basis of the underlying stock. If receiving money for the puts is considered income and taxed, then should the payment for calls be an expense and thus reduce the value of the holding? What am I missing here?

 

[ink]

Read the question carefully. He buys the puts, so that the premium that is paid for buying the puts is added to the cost basis of the stock. If the stock has a cost basis of 100, and you buy 5 dollar puts, then the cost basis goes to 105. The calls are the ones that are sold. That premium is taxed now. In a typical zero cost collar, where there is no mismatch in taxation, the premiums are going to cancel each other. In this case there is a mismatch in how the puts and calls are taxed, which leads to tax inefficiencies.
So what you got wrong is that he is not recieving money for the puts. He pays for them.

 

[prodigal]

Appreciate it!