OT ... Ali, I was specifically responding to your rewrite of elmerp's scenario in your prior post including a covered call for 20 shares. Since it was your rewrite I thought you'd make the connection. But I was wrong, so let me be more direct. You wrote ...
"Let me try to simplify Elmo's example. Suppose he has 100 shares of XYZ he bought 5 years ago for @10, and 100 XYZ he bought 2 years ago for @30. Let say today he has $1000 in cash and all these 200 shares, and the market values them at $50. His net worth is 200*$50+$1000=$11,000."
That would be true, if all the facts had been presented. But then you continue with another fact effective 2 years prior ...
"Now, two years ago he hired a man to paint his door, and he agrees to pay him for this job by an option to buy 20 shares of XYZ after two years of service at a fixed price of $30 ..."
... which invalidates the prior net worth statement. Elmo was short 20 option calls each worth $20. Therefore, his net worth was actually $10,600 ... immediately before exercise as well as after. (200*$50-20*$20+$1000=$10600)
We (elmerp, and you, and then I) were clearly talking about a covered call scenario. As elmerp stated, the value of the covered call -- long the stock and short the call -- was capped (at $20) when the call option was "sold". But then you proceed to write about a naked-call scenario. That's not productive IMO.
OTOH, I agree the IRS tax treatment of the exercise of a (non-statutory) fixed employee stock option is more like a naked-call than a CC. The intrinsic value is taxed as ordinary income to the employee ... and that same amount is a tax deduction for the company resulting in a "tax benefit from option exercise".
Ron |
