Written Options

Written Options
Premiums from writing put and call options should initially be recorded as a liability, not as income or gain. This is due to the uncertainty surrounding the ultimate gain or loss at the final disposition of the option. Subsequently the premium liability is adjusted for changes in the current market value of the option written and finally recognized as part of a gain or loss when the option contract is closed.
Three ways of closing a written option:
Option expires at maturity; the entire premium received represents a gain to the writer, and a loss to the holder
Closing purchase / buy to cover before maturity; a realized gain / loss similar to a security sale is recognized. A loss is reported if the cost of the closing transaction exceeds the premium received for the original position. A gain is reported if the cost of the closing transaction is less than the premium received for the original position.
Assigned / exercise at or before maturity; Proceeds of written option added to sale proceeds / deducted from purchase price. A covered call writer will receive the exercise price plus the premium received. The gain / loss will be based upon this amount. For the uncovered call writer, any realized loss will be reduced by the premium received. The writer of a put option will record as its cost basis the exercise price plus commissions reduced by the premiums received. The proceeds of securities sold by exercising put options should be reduced by premiums received.
Funds account for domestic options on MCH and foreign options are booked on MCH and priced manually utilizing off-line spreadsheets (unless the Derivatives Workstation is utilized).
Examples of option entries are illustrated below.
Option Written; 10 IBM 140 Calls @ $1.25
DR Receivable for Option
1250

CR Option Premium Liability

1250
The first day appreciation/depreciation is calculated by taking the difference between the current market value of the option and the original premium received. On subsequent days the change is calculated by taking the current market value premium and the previous market value premium. If the current market value premium is less than the previous premium:
DR Market Value of App/ Dep Options
250

CR Unrealized Gain / Loss Options

250
Closing purchase / buying back an option; 10 IBM Calls @ .75 = $750
DR Option Premium Liability
1250

CR Payable for Options Purchased

750
CR Realized Gain / Loss Options

500
Assigning / exercise of an option; When a call option is assigned, the option premium liability is closed out to realized gain / loss. For a put option, the option premium liability is closed out to cost of investments.
Expiring an option; 10 IBM 140 Calls @ 1.25 (Original premium price)
DR Option Premium Liability
1250

CR Realized Gain / Loss Options

1250
Generally the fund will designate the underlying security upon which an option is written. Segregated shares will appear on the SMAC report through the BPOS function. These securities should continue to be reported at value determined in a manner appropriate to the underlying securities