Cost Basis

Cost basis is the real, effective price a trader has paid for a stock position, once all relevant premiums are factored in — not just the sticker price of the shares themselves. After being assigned on a cash-secured put, for example, the real cost basis is the strike price minus the premium collected when the put was sold, since that premium reduces the trader's actual out-of-pocket cost. A $50-strike assignment with $1.75 in premium already collected has a real cost basis of $48.25, not $50. Cost basis matters for two reasons: it's the number that should inform later decisions, like where to set a covered call strike, and — separately, for U.S. tax purposes — the IRS treats a put's premium as reducing the cost basis of the shares acquired when that put is assigned (this differs from a covered call: if a covered call is exercised, its premium instead adjusts the sale proceeds on the shares sold, not their cost basis). A lower cost basis doesn't reduce the actual dollar exposure to the stock falling further; it only changes how a trade's real profit or loss should be measured.