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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study! -- Ignore unavailable to you. Want to Upgrade?

To: Michael Hart who wrote (13494)	1/22/2001 7:29:01 PM
From: OX	Respond to of 14162

>>>To minimize the tax implications assuming I get taken out I use CC's instead of Shorting against it so I DO NOT impact the holding period on the stock when considering the stock moving to long term gain status. <<< not that you'll get caught, but your tax assumptions are invalid... in that selling DITM calls are not considered "qualified" CC's and therefore terminate your short-term holding period.

To: Michael Hart who wrote (13494)	1/22/2001 7:35:17 PM
From: BDR	Read Replies (1) \| Respond to of 14162

<<To minimize the tax implications assuming I get taken out I use CC's instead of Shorting against it so I DO NOT impact the holding period on the stock when considering the stock moving to long term gain status. >> If I understand your intent correctly I gather you are saying that, to protect a short term gain until it becomes a long term gain, you sell a deep in the money call with an expiration far enough in the future to qualify the gain for long term tax treatment at the time of expiration. Are you sure about that? I am reading both Roth's LEAPS (1994 edition) and MacMillan's Options (1993 edition) and they both caution that the holding period stops if you write deep in the money calls to protect a gain. MacMillan, p.811, Tax treatment for the Covered Writer Determining the proceeds from the stock purchase and sale are easy, but determining the tax status is not. In order to prevent stockholders from using deeply in-the-money calls to protect their stock while letting it become a long-term item, some complicated tax rules have been passed. They can be summarized as follows: 1) If the equity option is out-of-the-money when first written, it has no effect on the holding period. 2) If the equity option was too deeply in-the-money when first written and the stock was not yet held long-term, then the holding period of the stock is eliminated. (This sounds like what you are proposing) 3) If the equity option was in-the-money, but not too deeply, then the holding period of the stock is suspended while the call is in place. (I have done this when I write covered calls on equities that have had a run up and that I expect to pull back) He then provides examples of each situation. Roth, p. 269 Offsetting positions This is a very important IRS concept. One or more positions added to another can change the tax treatment. The test is a "substantial reduction of risk of loss". If the position meets that test, there are consequences: 1. The holding period is suspended or terminated during the offset. 2. The wash sale rule applies to defer losses in some offset positions. 3. You cannot take a deduction for losses. Have tax laws have changed? I would want to check with someone knowledgeable in the area of taxes and options. Otherwise an IRS audit could have some unpleasant surprises.