Question

Investor A owns 1,000 shares of XYZ stock. Investor A buys 10 call options on XYZ stock. Investor B also owns 1,000 shares of XYZ stock and sells 10 call options on XYZ stock. A’s basis in his shares is $20,000 and B’s basis in her shares is $12,000. Both A and B owned their shares for 5 years prior to entering into any of the option transactions. A exercises his options and B is assigned on her options. Both A and B have 100,000 of short-term capital gains and $75,000 of long-term capital gains from other unrelated transactions. Both A and B are in the highest marginal tax bracket. The options were exercised on the day that they expired. The options are listed and have the following terms: XYZ 75 July - The price quoted is $3.50. A. – Explain the terms of the options. B. - After A exercises his options how many shares of XYZ will he own? Will A recognize any gain or loss on these transactions? If so, how much? What will its character be? C. - After B is assigned on her options how many shares of XYZ will she own? What will the basis in her shares be? Will B recognize any gain or loss on these transactions? If so, how much? What will its character be?