Reducing the Cost Basis
The Cost Base or Cost Basis is the average cost of a stock which you acquired in multiple transactions over a period of time.
Cost Basis of Stocks
Here is an example to calculate cost basis. Suppose you purchase 100 shares of The XYZ Zipper Company once per quarter for two years. That means you’ve acquired 800 shares (100 shares x 8 quarters).
To calculate cost basis, you merely take the accumulated amount of money you’ve spent purchasing the stock and divide it by the total number of shares acquired, in this case 800. The result is the cost basis, or average share price you’ve paid of each of your 800 shares.
Easy techniques to reduce Cost Basis
Through the strategic use of options. When you sell options you can lower your cost basis regardless of market conditions. And that has profound consequences.
An adjusted cost basis that is consistently and incrementally lowered means that you minimize (or even eliminate) losses when your stock trades lower; it means that you generate gains when your stock is flat; and it means that you bank even greater gains when your stock moves higher.
Through various conservative option trading techniques, it is possible to lower your cost basis and it’s very simple to do. When we’re talking about adjusted cost basis, we’re talking about adjusting it lower.
How can you lower cost basis of stock options?
In short, adopting an adjusted cost basis mindset empowers you to always acquire your stocks for a discount – and then to receive perpetual rebates thereafter. There are a number of ways to lower cost basis of stock options.
- Trade liquid products so that you can easily sell it
- don’t pay the bid/ask price but the mid price
- buying stocks by selling an ITM option
- lowering your option price to sell an spread
- negotiate sharper prices for contracts with your broker
- If you want to buy stocks sell a put option first
- Write covered calls on stock you own.
If you own stock or want to own it you can use the last two strategies. You can reduce the cost basis of stocks by selling a put just under the market price. If the stock price increased the option may expire worthless and you can sell another put. By doing so you can reduce the cost basis time after time, as long as the stock price is higher than the put option strike price.
It takes more capital to acquire stocks then using options. So, we recommend the first 5 strategies for selling option premium. These strategies provides a bigger profit for a less investment. In other words using options has a higher return on capital.