Andy D,
My understanding of the qualified ITM covered call is the same as yours. The holding time of the underlying is suspended, but it will be long term if you already held it for a year. If you buy back the call at a loss and hold the underlying to year end, the covered call is qualified only if you hold the underlying naked for at least 30 days in the new year. If you sell the stock you recognize the gain or loss as LT or ST depending on the holding time prior to selling the call. If you are assigned, the combined position is LT or ST depending on the holding time of the underlying prior to selling the call with the call premium adjusting the basis of the underlying.
Selling a non-qualifying covered call is like shorting against the box. It is deemed a "constructive sale". The holding period of a ST underlying is terminated. If you have a gain on the long you have to recognize that gain as if the long was sold and immediately repurchased. If you have a loss, you have to treat it as a wash sale. Gain or loss on the short is LT or ST depending on how long the long was held. There are exceptions enumerated on page 6. You have to fight your way through all the goobly-gook starting on page 5, but the short answer is that they are not two separate transactions. Unless, the Treasury regulations ultimately comes out excluding options from constructive sales rules. In other words, nobody yet knows for sure how to handle options, but it appears the constructive sales rules do and will apply to non-qualified covered calls.
From page 7
The constructive sale provision is generally
effective for constructive sales entered into after
June 8, 1997. Special rules apply to transactions
before that date that would otherwise have been
constructive sales under this new provision.
Options are not specifically covered, but the
legislative history is very clear that many transactions
involving options, including the buying or
writing of certain in-the-money options, will be
subject to the constructive sale rule through the
issuance of Treasury regulations. In determining
whether a particular transaction will be treated as a
constructive sale, the Treasury regulations may take
into account the yield and volatility of the underlying
stock, the length of time until maturity and
other terms of the option. The regulations may also
rely on option prices and option pricing models.
However, transactions involving stock and also out-of-
the-money options, at-the-money options or
qualified covered calls should not trigger the constructive
sale rule.
Dan |
