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Understanding Basis Reduction

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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

One of the primary advantages of trading options is the ability to reduce the basis of a position. However, determining the basis after placing a number of positions or scalps can be difficult. Tune in to hear Tom and Tony discuss calculating basis reduction!

To calculate new cost basis:

  1. Calculate the weighted average price of outstanding shares.

  2. Calculate profit per share by dividing profit / loss from scalps by understanding share amount.

  3. If long shares, subtract (add) profit (loss) to the average outstanding share price.

  4. If selling options against positions, divide premium by the outstanding share amount.

Knowing the basis of our position helps with understanding where an underlying’s price can go while we remain profitable. Be sure to check out Tom and Tony break down the math to help you understand basis reduction!

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