NISM Certifications · NISM-Series-VIII: Equity Derivatives · Accounting and Taxation
In accounting for a stock option contract by the buyer (holder) under ICAI guidance, the premium paid on purchase of the option is:
The premium paid by the option buyer is debited to an Equity Stock Option Premium Account at the time of purchase. It is not treated as income or margin, and it is later adjusted on exercise, lapse or square-off of the option.
- ADebited to an 'Equity Stock Option Premium Account'Correct
- BCredited to the profit and loss account as income
- CDebited to the margin account
- DIgnored until exercise
Explanation
The buyer pays the premium and debits it to an Equity Stock Option Premium Account, which is an asset-like account until lapse, exercise or square-off. It is not income and not part of margin. At the balance sheet date, any debit balance is provided for if the option is out of the money, as per prudence.
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