Cost Basis

You are correct.  You have a short-term capital gain in the amount of (premium, less commission).

And for tax purposes, the cost basis remains at the original $2,000.  I was referring to the informal bookkeeping in which the investor can consider that he/she paid $2,000 and has $400 is cash (less taxes).  That investor can think of owning the stock at the reduced price (lower basis).  But in legal terms, and in taxpayer terms, you are correct.

I apologize for not being clear.


July 28, 2010

Covered Call Writing II
At the end of the year, if your stock is trading at
less than $20 per share, the option expires worthless and your cost
basis has been reduced from $2,000 to $1,600.  That's a very good
result - especially when the stock has not performed as expected.

Mark, Maybe I don't understand your point, however, my
understanding is that when an option expires worthless you,
as the writer of the option, report a short term capital
gain in the amount received for the call written.     The
cost basis of the underlying stock is not adjusted.   (IRS
Pub 550 page 58)