Explain the Concept of “Cost Basis” in This Calculation.
The cost basis of the underlying asset is the initial price paid for it. In the collar calculation, the net premium received or paid effectively adjusts this cost basis.
A net credit reduces the effective cost basis, while a net debit increases it. This adjusted cost basis is crucial for determining the overall profit or loss, especially at the breakeven point.
Glossar
Adjusted Cost Basis
Basis ⎊ The adjusted cost basis (ACB) represents the modified original cost of an asset, particularly relevant in cryptocurrency, options, and derivatives trading for tax and accounting purposes.
Cost Basis
Calculation ⎊ Cost basis represents the total original value of an asset for tax purposes, encompassing the purchase price plus any associated transaction fees or commissions.
Net Premium Received
Valuation ⎊ Net Premium Received represents the aggregate premium inflows accepted by an options writer or seller, less any adjustments for fees, commissions, or exercised options, forming a crucial component of derivative revenue.