A reader of Canadian Tax Resource asked me to write about the income tax consequences of buying and selling stock options. Before getting into the taxation of stock options, it is important to the types of options available.
The Two Types of Stock Options
A stock option is a contract that represents the right of one party to buy an underlying stock for a specified price on or before a certain date. There are two types of options: Call Options and Put Options.
Call Options – A call options grants the holder or buyer the right to buy the underlying share at the stated price on or before it expires. The seller or writer of the call option has an obligation to deliver the share at the stated price until the expiry date.
Put Options – A put option grants the holder or buyer the right to sell underlying share at a stated price on or before the option expires. The seller or writer of the put option has an obligation to buy the security at the stated price until expiry.
Making Money With Options
Properly used, options can provide insurance against falling share prices or generate some income from their sale. Some more aggressive investors may speculate and buy and sell options themselves.