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Technology Stocks : Qualcomm Incorporated (QCOM)
QCOM 166.81-4.1%Nov 17 3:59 PM EST
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To: Morgan Drake who wrote (32400)6/20/1999 3:13:00 PM
From: Geoff Nunn  Read Replies (2) of 152472
 
Morgan: When guys have sold options which are now deep in the money, they either redeem the options (with cash) or they let the stock go. I would never go back into the market and buy stock to cover a previously covered call sale.

Never??? I think your view is completely wrongheaded. If you've written call options which are deep in the money, entering into the market and buying shares of stock for delivery may be a lot less costly than redeeming the options. Simple arithmetic proves this. If you buy shares of stock, the brokerage and MM costs are likely to be peanuts compared to what it will cost you to redeem the options. Your main hit on an options trade is the bid/ask spread. These spreads dwarf (in percentage terms) the b/a spreads normally seen on stocks. The commission paid to your broker is also likely to be less (as little as 1 cent/sh on stock transactions at some online brokers) if it's a stock trade.

In addition to the savings in transactions costs, you can also reduce your capital gains taxes by buying shares for delivery. If you buy shares in the market, the cost basis will be the market price of the stock. This of course will be higher than the cost basis on the shares you already own. How many shares you need to buy at assignment, in order to avoid paying capital gains taxes, can be computed mathematically. Even if your call options are fully covered, you're still generally better off to buy some new shares in the market. When these are delivered along with some - not all - of the shares you already own, this is how you go about reducing your capital gains tax.
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