Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Covered Calls for Dummies Thread -- Ignore unavailable to you. Want to Upgrade?

To: LemurHouse who wrote (3078)	11/21/2001 8:50:35 PM
From: WTMHouston	Respond to of 5205

<<My question is, is there a third alternative when delivering the shares: I.E. could I have instructed my broker to establish a short position for me in AMAT, and to deliver the shares from the short position.>> The problem with your intriguing and innovative strategy is . . . . I thought I had an easy way to explain it, but the more I think about it the more I think that my initial proposed explanation does not make sense because your strategy does make sense from an investing standpoint. However, from a practical standpoint, it is likely that the brokerage said no just because they had never heard of it before and because they had no computer mechanism to account for it the way you wanted to structure it. Your proposed strategy would likely play havoc with their internal cash distribution and margin calculations since there will be a negative cash value differential between the consideration received from the purchaser of your called out shares and the current market value. While this is really little more than marking the short to market, which they do regularly, I doubt that their system is set up to do it as a result of the form of transaction you proposed. I suspect that to end up with your short against the box and to protect your tax position, you will have to make a market purchase of shares to deliver and then establish a separate short position to be in position to take advantage of the decline you predict. Of course, you end up with a lot of transactions to accomplish indirectly what could be done directly with what you proposed. Just my thoughts. Troy

To: LemurHouse who wrote (3078)	11/21/2001 10:35:04 PM
From: Dan Duchardt	Read Replies (1) \| Respond to of 5205

Andrew, I see a couple of problems with what you have stated. If I had allowed myself to be called out and delivered the shares from my long position in AMAT, I would have faced substantial capital gains liability. To avoid this liability -- and assuming for the moment a desire to maintain the underlying long position -- I could have bought AMAT at the close, and at tax time designated the new shares as the shares that were delivered under the options contract. My question is, is there a third alternative when delivering the shares: I.E. could I have instructed my broker to establish a short position for me in AMAT, and to deliver the shares from the short position. That would have left me on Monday morning with my original long position in AMAT, plus a short position for the number of shares delivered as a seller of the calls. i.e. shorting against the box. I could then have closed the short position in a few days when the share price had drifted back down. I added the bold to call attention to a few things. I am not a tax professional, but I've been paying attention to what they say and reading things on my own. You should certainly consult one before accepting what I say, but here goes: The IRS has gone out of its way to close the loopholes that allowed people to "avoid tax liability". Specifically, you do not get to wait until tax time to designate the shares you sold. Unless you designated them at the time of the sale, and have acceptable documentation from your broker identifying the shares you sold at the time of the sale, you are required to use first in- first out (FIFO) accounting. Furthermore, shorting against the box is no longer permitted by the IRS to avoid (or postpone) tax. For tax purposes, shorting against the box is treated as if you you had sold your long position. When you cover the short, you are considered to have taken a new position. The only thing you could have done would have been to buy shares before expiration, and direct you broker to cover the assignment using the new shares ahead of time. A full service broker would almost surely do that for you, and provide the needed documentation. Many online brokers can't be bothered to do that sort of thing. Dan