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Technology Stocks : All About Sun Microsystems
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To: Bald Eagle who wrote (7838)2/19/1998 2:01:00 PM
From: Hugh A. McWhorter  Read Replies (1) of 64865
 
Glad to see another covered call seller on SUNW.

As to IRS rules--if the call expires worthless it's a capital gain to the seller-- sell date is date of acquisition, expiration date is date of sale. All short term capital gain if period outstanding < 18 months. If position open > 18 months (this would be a leap) you would receive favorable long term capital gain treatment.

if the stock is called treat call proceeds (what you receive when called) separately as a capital gain as brokers are not required to report call proceeds received on 1099-B. Report proceeds received at time of call as a security sale (call price less commissions as schedule D proceeds received, date of call (date called from you) = date of sale. date of stock acquisition = date stock acquired). as separate line item--IRS matches what brokers report which is only proceeds at time stock called. Thus you have 2 things to report--proceeds at time of call (it's a closed transaction then, not when you receive the cash) and proceeds less security basis at time security called.

if you roll (buy back outstanding call sell a new one) the old position is closed and depending on the outcome you may be faced with the wash sale rules (loss not allowed if comparable security--i.e.--another call position entered into within 30 days). If wash sale rules apply carry over unrecognized loss as part of basis of new call. If the close of a roll results in a gain report the gain.

Clear as mud?

Back to SUNW.

I like selling calls considerably out of the money on this stock because it is so volatile. Example--with the stock in the mid-forties in mid January I sold April 55's for $1 1/8. About $10 out of the money but still a nice return for such a short period of time. Sort of like a dividend--perhaps a little better. If the stock runs to $55 the plan is to roll (buy back the $55 sell a call further out of the money for a further point in time out). If the $55 expires worthless do the process again but always stay way out of the money. I would get hurt on this strategy if the stock ran past $55 in a short period of time. It would be tough to roll.

I remain bullish on SUNW so I stay considerably out of the money for a short time. I wait for a run in the stock and then sell what I consider to be considerably out of the money calls.

If I was in a "hold" mode on the stock- thinking it was not going to move- I would sell calls for a strike closer to the current price of the stock. Strike date determined by premiums present.

The right way to sell calls can only be determined with hindsight but this out of the money strategy has worked for me so far on SUNW.

Hugh
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