How is realized P&L calculated when stock options are exercised or assigned?

Question

Accepted Answer

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 i