Selling Options Short

A new feature in MI 6 allows you to sell put and call options short. This is also known as writing an option.

When you take a short position in a call option you are granting a right to purchase shares of the underlying stock at a specified price (the strike price). Should the purchaser of the call exercise this right, you are obligated to deliver the shares at the specified price.

When you take a short position in a put option, you are granting a right to sell shares of the underlying stock at a specified price (the strike price). Should the purchaser of the put option exercise this right, you are obligated to purchase the underlying stock shares at the specified price.

Opening a Short Option Position
To record a short sale of an option click the button for the option type you are selling then choose “Sell Short” from the menu. On the short option screen, fill in the following information:

Short Option Data

Data Field Description

Option: Click the Option button to select the option being shorted (written).

Portfolio: Click the portfolio button to select the portfolio that will hold the short position

Option on Stock: Click the Option on Stock button to choose the stock shares that are being optioned.

Date Written/Sold: The date the short position was opened. Shares Optioned Gross Cost of shares sold

Commission: The purchase commission

Other Expense: Any other cost associated with the purchase of the stock delivered to the broker.

Net Proceeds Computed: Sum of the cost, Commission, and other cost

Date Covered: See Closing a Short Position below

Cover Method: Buttons See Closing a Short Position below

The following fields are active only after clicking the button to “Buy Option to Cover.”

Date Bought: Date an equivalent option was purchased to cover the shorted option.

Cost: Cost of the option

Commission: Commission paid on purchase of the option

Other Cost: Other costs paid to purchase the option

Total Cost Computed - Cost plus commission and other cost. Cost Basis Computed - You may override this value

Gain Computed.

Closing a Short Option Position
A Short position in an option may be closed in any one of three ways.

The option may expire. Each time MI is started, it checks for expired options and marks any open options as expired if their expiration date is before the computer’s system date. When a shorted option expires, the net amount received from the sale of the option becomes a realized capital gain.

Buy Option to Cover. An option equivalent to the one sold short may be purchased to cover your obligation. To buy an option to cover a shorted option, click the button for the option to be covered and choose “Cover/Edit Short Position” then select the option and the share lot to be covered. On the short option screen click the Buy Option to Cover button and fill in the following information.

Date Bought: Date an equivalent option was purchased to cover the shorted option.

Cost: Cost of the option

Commission: Commission paid on purchase of the option

Other Cost: Other costs paid to purchase the option

Total Cost Computed - Cost plus commission and other cost. Cost Basis Computed - You may override this value Gain computed.

Cover with Existing Shares. When the purchaser of the option exercises the call option you may cover your obligation by selling the underlying shares at the specified strike price. If you do not already own the shares in your portfolio, you will need to record a purchase of these shares before proceeding. To cover the shorted call with existing shares, click the Call Option button and choose “Cover/Edit Short Position” then select the option and the share lot to be covered.

Enter the date the share lot was covered then click the button labeled “Cover with Existing Shares” This will display a window requesting that you enter the number of shares sold. The default is the number of shares covered by the option but you can change this to a lesser amount.

After entering or confirming the number of shares sold, click the Save button. The Security sales screen will then be displayed with most fields already filled in.

On the security sales screen fill in the amount of any sales commission and choose the sales method (first in - first out, etc.) Note: the gross from the sale of the underlying shares has been computed as the number of shares times the strike price plus the net from the short sale of the call option.

Buy Underlying Shares. When the purchaser of the option exercises a put option you may cover your obligation by buying the underlying shares at the specified strike price. To cover the shorted put by buying the underlying shares, click the Put Option button and choose “Cover/Edit Short Position” then select the option and the share lot to be covered.

Enter the date the share lot was covered then click the button labeled “Buy Underlying Shares.” This will display a window requesting that you enter the number of shares purchased. The default is the number of shares covered by the option but you can change this to a lesser amount.

After entering or confirming the number of shares bought, click the Save button. The Security purchase screen will then be displayed with most fields already filled in. Fill in any missing amounts such as commissions and fees as needed.