Cost basis calculation

I keep a running total per ticker. Every premium collected, whether from CSPs or CCs, reduces my basis. Feels cleaner than trying to separate "payment for waiting" from actual cost reduction. The downside is it can make you pick a CC strike below your mental break-even, but at that point I'd rather just close the whole position and move on than try to squeeze pennies.

I track both. Original cost basis, adjust cost basis and premium collected. No reason not to. It isn't that hard to do and it provides more visibility to the entire position. I also have other things I track.

I'm going to go against both and say my cost base is the strike I got assigned on, I see no benefit to calculating anything else. If I sell at my adjusted cost base (strike - premiums recieved) then I've gained absolutely nothing and have just handed back every single bit of premium that I've made and wasted my time completely

Agree. For me the strike I was assigned at is the minimum CC strike goal for the way I trade the wheel or option selling in general This is different from taxable costs basis which I believe causes confusion because people use the word basis differently.

Neither the IRS nor your brokerage will agree.

I am obviously not talking about your tax cost base, I'm talking about making income from the wheel - which i believe is the whole point, no?

There is no other cost basis. Cost basis determines profit or loss, profit or loss determines the earned income tax liability. All the imaginary permutations of that basic tenant mean nothing and don’t create more profit no matter how big or unwieldy that spreadsheet becomes.

Premium received for short puts that expire w/o assignment becomes taxable Realized income. That contract is over. No shares change hands. Premium received for short puts that are assigned is deducted from the strike price thus creating the cost basis of those shares. This is, as yet, a non-taxable Unrealized event; it does not become a taxable realized event until those same shares are sold. In this way, the premium is not taxed twice nor do two taxable events occur in connection with the same short put contract.

You are really asking about your logical break even on the trade. Basis is a tax term, not a trading term. Each lot of shares has its own cost basis that doesn’t change. You sell CC and that is income. When you sell a lot from assignment, that’s a loss or a gain. You should track everything to know if you made a profit or loss on a trade.

I take a full accounting view to keep track of my adjusted cost per share, but I use the premiums to offset the cost of adding shares to my account to hold long as well as generate income from the options. That said, I do try to sell calls above my assignment price so I can take advantage of capital gains as well as options premiums if I'm assigned a call. I made a video about how I set up my spreadsheet. Let me know if you want a link to it.

My approach is C - no premiums received because I don't sell to lose.

IRS only counts the first one as your cost basis

Approach A - when a CSP is not assigned, the wheel is over in step 1. You restart the wheel again selling a new CSP. Like others have mentioned, post CSP assignment selling a CC at your ACB is giving away all the premium earned for nothing. Why do that? I do keep a track of my ACB only when selling CCs. Here to I don't sell below my cost basis, but knowing the ACB on the CC side keeps me knowledgeable to understand what my ROI is over the long run of that wheel cycle. This is why I built my free application to save me from all this mental work. Link in my profile, if needed.

The A vs B framing is really two ledgers getting mixed. For tax, only the premium from the put that actually assigned you reduces basis, and that number is fixed per lot once the shares land. The puts that expired and the calls you sell later are each their own realized income, already paid out and already counted. The trap is taking your running all premiums collected number and using it to set the CC strike. That premium already paid you once. If you then let it drag your call strike down to some adjusted break even, you are spending the same dollars twice, once as income and again as a lower cap on your shares. That is the handed it all back problem a couple people pointed at. Cleaner to decouple it. Track cumulative premium as a scorecard for whether the whole wheel made money, but pick the CC strike off where you are genuinely willing to let the shares go, a price target or a tax lot you want to close, not off any break even number. The break even tells you how the campaign is doing. It should not tell you where to sell.

I run it the same way I see in the tax code—your basis is just strike minus the premium from the contract that actually assigned you. All the other premiums are already taxed as income, so they shouldn’t adjust your cost basis for picking a covered call strike. That keeps the CC price you target coming from a real stop‑loss, not the math that rolls back your gains.

I try to extend my wheel for solid growers. I want to know my entry price per share for the open trade so the strike minus short put. But I also set my call strike to generate income over time to first lower that basis and hold on to winners by leaving a few contracts uncovered. For example if my cost basis is 100 I will evaluate if the premium is good at 105 but not cover all my shares. If they get called away and I still have half of shares my cost basis is 90 on the remaining shares. I then set delta 20 calls if I have a higher price target. It’s been very good for SHOP and HOOD this year.

I’d look at it in two ways. For tracking the wheel’s overall profitability, I’d count all premiums collected, including the CSPs that expired worthless. But for deciding which CC strike to sell next, I’d focus on the stock’s current price, the strike I’m willing to sell at, and the premium available. Don’t let a lower adjusted cost basis convince you to hold a stock you wouldn’t buy today.

Both, for different jobs. A is what the broker and the IRS see. The expired puts were already gains the week they expired. B is what I'd use for the CC strike. Say 50 strike, four $1 puts, assigned on the last. B is 46, so a 47 call is campaign positive. Just know the broker still shows a loss on the shares, and reselling a put on that name inside 30 days is a wash sale.