When a put is exercised, how is the cost of acquisition calculated?

When a put option is exercised, the calculation for the cost of acquisition is based on the strike price at which the option was executed and takes into account any premium that was received for selling that put option. The correct approach considers that the holder of the put option has the right to sell the underlying asset at the strike price.

In this case, when the put is exercised, the seller (the option writer) pays the strike price to the option holder in exchange for the underlying asset. However, if the option holder is also the seller of the put, they have already received a premium for the option at the time it was sold. Therefore, the effective cost or the net outlay to acquire the position is reduced by this premium.

So, to find the cost of acquisition, you would take the strike price (what they receive when exercising the put) and subtract the premium that was received when the put option was sold. This results in determining the net cash flow from the transaction and accurately reflects the cost associated with the acquisition of the underlying asset when the put is exercised.