How is realized P&L calculated when stock options are exercised or assigned?
When you hold options, two main things can happen at expiry:
- The option expires worthless
- The option is exercised/assigned, leading to a stock transaction
We record this in two places:
- The options side (closing the option position)
- The stocks side (the resulting stock delivery)
1. Options side (closing the option position)
1）If the option ends via exercise/assignment
- The option contract disappears.
- The premium you paid (or received) is not realized as separate P&L on the option.
- Instead, the option cost is rolled into the stock P&L:
- If the stock trade is opening a new position → option premium becomes part of the stock cost.
- If the stock trade is closing an existing position → option premium is included in the stock Proceeds for realized P&L.
2）If the option expires at maturity without being exercised/assigned
- The option expires worthless.
- The premium you paid becomes a realized loss on the options side.
2. Stocks side (delivery / exercise assignment)
When an option is exercised or assigned, a stock transaction is generated. For that stock transaction, two situations:
1）Stock trade is opening a position (Open)
- We add:
- The stock settlement amount (strike price × shares)
- The option premium
- Together as the stock cost.
- This will show in your average cost per share.
2）Stock trade is closing a position (Close) There are two sub‑cases:
Case 1: Closing quantity ≤ existing position size
- The stock settlement amount plus the related option premium → is fully included in the Proceeds for this closing trade.
- Realized P&L is based on:
- Proceeds (including option cost)
- Minus original stock cost of the closed shares
Case 2: Closing quantity > existing position size
- Part of the trade is closing an old position, part is effectively opening a new position.
- We split the stock settlement amount and option premium in proportion:
- The portion corresponding to the original position size is treated as Proceeds for realized P&L.
- The remaining portion is treated as cost for the new opened shares.
3. Examples
1）Common setup
- Underlying: AAPL
- Current spot price: 220 USD
- You buy: AAPL 230 Call (OTM)
- Option premium: 5 USD per share (1 contract = 100 shares ⇒ total cost 500 USD)
Scenario A: Option expires without exercise (stock price below 230)
At expiry, AAPL < 230, so the call has no intrinsic value and is not exercised.
Options side:
- The option expires worthless.
- The 500 USD premium you paid is recorded as a realized loss of −500 USD in your options P&L.
Stocks side:
- No stock is delivered.
- No change to your stock positions.
Scenario B: Option is exercised and you open a long stock position (stock at 250)
At expiry, AAPL = 250. You hold the 230 Call, it is exercised. You buy 100 shares of AAPL at the strike price.
1）Options side (closing)
- The option contract disappears.
- The 500 USD premium is not recorded as separate realized P&L on the option.
- Instead, the 500 USD is added into the stock cost.
2）Stocks side (opening)
- Exercise price: 230 USD per share
- Option premium: 5 USD per share
- Final stock cost per share = 230 + 5 = 235 USD
At this point:
Realized P&L: 0
- This is an opening trade. You have just established a new long stock position; no shares have been sold yet, so there is no realized P&L.
Unrealized P&L (using current market price 250):
- Unrealized profit = (250 − 235) × 100 = 1,500 USD
Scenario C: You are short the stock and use the Call exercise to close the short (stock at 250)
Assume:
- You already hold a short position: −100 shares of AAPL
- Short entry price: 200 USD per share
- At expiry, AAPL = 250
- Your 230 Call is exercised: you buy 100 shares at 230, which are then used to close your short.
1）Options side (closing)
- The call option is exercised and disappears.
- The 500 USD premium you paid is rolled into the P&L of the short stock close, not recorded separately in options P&L.
2）Stocks side (closing)
- Exercise price: 230 USD per share
- Option premium: 5 USD per share
- From the short’s perspective, you are effectively buying back at 235:
Proceeds (for closing the short):
- Proceeds = −(230 + 5) × 100 = −23,500 USD
- (Negative because buying shares to cover a short is a cash outflow.)
Realized P&L calculation:
- When you opened the short, you sold 100 shares at 200:
Opening cash in: +200 × 100 = +20,000 USD
- When you close the short via exercise (including option premium):
Closing cash out: −23,500 USD
- Realized P&L = 20,000 − 23,500 = −3,500 USD
Unrealized P&L: 0
- Your AAPL short position is fully closed. You hold no AAPL shares (long or short), so there is no remaining unrealized P&L.
