Calculating Cost Basis After an Adjustment

Thinking back to the post from January 8th, we set up a collar optionexample using SPY. The proposed trade involved buying SPY at 467.92, then buying the June 28th 468 strike put and selling the June 28th 483 strike call option. The options resulted in a net credit of $0.01 which made the original cost basis 467.91. There was no downside risk and the upside gain capped out at $1509.

Although not much time has passed, we can go through an example of how an adjustment can be made and figure out the new cost basis. Using todays end of day numbers, the orignal options can be closed out (selling the put and buying back the call), for about $5.45. This portion of the trade is at a loss while the shares have gained value. This loss adds to our cost basis. We now have a cost basis of 467.91+5.45=473.36.

For the new options, I would buy the June 28th 474 strike put and sell the June 28th 490 strike call. These have a net cost of $0.33. This debit adds to the cost basis, which now becomes 473.36+0.33=473.69. Let's see what this does overall!

On the downside, the position has a small gain, 474-473.69=0.31 or $31.

On the upside, the gain is 490-473.69=16.31 or $1631.

This new setup has a better outcome than the previous. I would not necessarily make these adjustments frequently, but it is nice to know that the trade has guaranteed profit in either direction!