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

To: andydaoust who wrote (3426)	2/26/2002 5:29:46 PM
From: Dominick	Read Replies (1) \| Respond to of 5205

Andydaust: I know nothing about taxes but here is a paragraph from the book "Tax Facts 2" ,(there are 2 books 1 and 2),by the National Underwriters Company. This is for the year 2000. Page 45 # 63 How is the writer of a call taxed when the option is exercised by the owner? "When a listed or unlisted call is exercised and the writer thereof is called on to sell the underlying stock, the writer adds the amount of the option premium he received for writing the call to the total striking price to determine the total amount realized in the sale. Then to the extent that the total amount realized exceeds the writer's tax basis in the stock sold, he realizes a capital gain; if his tax basis exceeds the total amount realized he has a capital loss. The nature of such gain or loss generally depends on the holding period of the stock sold. Irrespective of the time the call was outstanding." There's no mention of ITM or OTM. Boy am I glad I don't have to get involved with this crap. Dominick

To: andydaoust who wrote (3426)	2/26/2002 5:56:21 PM
From: Dan Duchardt	Read Replies (1) \| Respond to of 5205

Andy D, My understanding of the qualified ITM covered call is the same as yours. The holding time of the underlying is suspended, but it will be long term if you already held it for a year. If you buy back the call at a loss and hold the underlying to year end, the covered call is qualified only if you hold the underlying naked for at least 30 days in the new year. If you sell the stock you recognize the gain or loss as LT or ST depending on the holding time prior to selling the call. If you are assigned, the combined position is LT or ST depending on the holding time of the underlying prior to selling the call with the call premium adjusting the basis of the underlying. Selling a non-qualifying covered call is like shorting against the box. It is deemed a "constructive sale". The holding period of a ST underlying is terminated. If you have a gain on the long you have to recognize that gain as if the long was sold and immediately repurchased. If you have a loss, you have to treat it as a wash sale. Gain or loss on the short is LT or ST depending on how long the long was held. There are exceptions enumerated on page 6. You have to fight your way through all the goobly-gook starting on page 5, but the short answer is that they are not two separate transactions. Unless, the Treasury regulations ultimately comes out excluding options from constructive sales rules. In other words, nobody yet knows for sure how to handle options, but it appears the constructive sales rules do and will apply to non-qualified covered calls. From page 7 The constructive sale provision is generally effective for constructive sales entered into after June 8, 1997. Special rules apply to transactions before that date that would otherwise have been constructive sales under this new provision. Options are not specifically covered, but the legislative history is very clear that many transactions involving options, including the buying or writing of certain in-the-money options, will be subject to the constructive sale rule through the issuance of Treasury regulations. In determining whether a particular transaction will be treated as a constructive sale, the Treasury regulations may take into account the yield and volatility of the underlying stock, the length of time until maturity and other terms of the option. The regulations may also rely on option prices and option pricing models. However, transactions involving stock and also out-of- the-money options, at-the-money options or qualified covered calls should not trigger the constructive sale rule. Dan

To: andydaoust who wrote (3426)	2/26/2002 6:15:04 PM
From: BDR	Read Replies (2) \| Respond to of 5205

<< I still can't find answers to: "selling qualified covered calls that are in the money suspends holding period for underlying stock".>> Holding periods and tax implications of covered calls are mentioned in McMillan and Roth (currently available editions are 8+ years old). The subject was discussed some on the How to Write Covered Calls Thread about a year ago: Message 15226461 siliconinvestor.com and subsequent posts. and it came up again on this thread in May, 2001 and at other times: Message 15767737 and subsequent posts. Hope that helps but it probably won't since the application of the rules relies on the interpretation of phrases like "deep in the money". How deep is deep?