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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: Dan Duchardt who wrote (3146)12/17/2001 11:19:29 PM
From: BDR  Read Replies (2) of 5205
 
<<Are you saying that the constructive sale does not have to be recognized in the year the option is sold? Does being short the ITM call merely suspend the holding time of the underlying?>>

From what I have read, I believe that is the case. To use the DELL example, if one had bought at 18 in September and now had a 10/share gain, selling the Jan '03 LEAPS 15 for $14.60 does not create a taxable event. Taxes are owed when the calls are either bought back or exercised, which with this example is most likely a year+ later. With LEAPS that creates some interesting wrinkles. Say it is now Jan '03 and DELL is selling for 20. If the call is exercised the gain (15 strike + 14.60 premium - 18 cost = 11.60) is a short term gain. The clock stopped when you sold the deep ITM LEAPS in December '01 and at that time you only had a short term holding period. But if, instead, you sold the stock in Jan '03 you would have a long term gain of $2 and if you bought back the call at $5 you would have a long term gain of $9.60. The holding period for both securities separately is greater than a year but together is only three months. In that case you would probably want to avoid exercise in a taxable account.

With LEAPS you get your money now but don't have to settle up with the tax man until much later, if you choose.

Caveat- not a tax attorney, CPA or registered rep and I won't even have net capital gains to pay for years to come, so what do I know. :(

cboe.com
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