Question on optimizing profit for an in-the-money call contract position.
We all know that several days/weeks prior to expiration, an in-the-money call contract will not only have intrinsic value, but time value and/or volatility premium.
However, if you decide to exercise the calls in advance of expiration, you essentially throw away the time value/volatiliy component of your premium and your broker deposits the intrinsic value (current price minus strike price) in your account and uses whatever cash available to buy the underlying stock for your account, corresponding to the options.
Therefore, it is to your advantage to essentially perform the exercise yourself by SELLING the call contracts to capture the premium, then buy the underlying stock on the same day. This is really a question as to how the IRS views this "do-it-yourself" exercise versus a "brokerage-handled exercise."
Let us first assume I want to convert a short-term Call Option capital gain into a long-term stock holding wherein I end up owning the actual shares controlled by the call contracts.
My question is: Is there a difference (as far as the IRS is concerned) between having your broker EXERCISE in-the-money Call Options and actually SELLING the in-the-money Call Options and THEN BUYING an equivalent number of shares in the underlying stock that were controlled by the just-sold Call Contracts?
Suppose, for example, I buy 100 contracts of the Microsoft March 120 Call contracts for $1.00 per contract. A few days later, Microsoft stock is trading at $125 and my Microsoft Call Contracts are worth $6 per contract.
At this point, I have the choice of either SELLING the Call Options, or EXERCISING them, which means telling my broker to exercise the options. The transaction that occurs at the brokerage house is that the Call Option position is closed out and the intrinsic value above the strike price is credited to my account. Then, the Broker buys (and puts in my account) an equivalent amount of shares as were controlled by the Call Option contracts I formerly held.
As I understand it, doing so allows me to NOT incur a short-term capital gain event and the cost basis of my stock shares is the strike price of the options and the start date of my ownership of those shares for capital gains purposes is the date of options exercise.
The question (once again rephrased) I have is:
MAY I SELL MY IN-THE-MONEY CALL CONTRACTS AND BUY AN EQUIVALENT NUMBER OF SHARES CONTROLLED BY THOSE OPTIONS ON THE SAME DAY AND NOT HAVE A TAXABLE EVENT AS WELL? THIS IS ESSENTIALLY THE SAME AS WHAT A BROKER DOES WHEN I "EXERCISE" THE IN-THE-MONEY OPTIONS, BUT WHEN I DO IT MYSELF, THERE IS MORE PROFIT BECAUSE THE OPTIONS THEMSELVES MAY HAVE EXTRA TIME VALUE IF I EXERCISE SEVERAL DAYS/WEEKS BEFORE EXPIRATION.
Anybody have any experience with this? Comments appreciated! |
