920 Part VI: Measuring and Trading VolatiRty 
that call was in-the-money, he could have elected to let the call be assigned and to 
take his profit on the position at that time. However, this would have produced a 
short-term gain, since the stock had not yet been held for one year, so he elected 
instead to terminate the October 35 call through a closing purchase transaction and 
to simultaneously write a call whose expiration date exceeded the one year period 
required to make the stock a long-term item. He thus wrote the January 40 call, 
expiring in the next year. Note that this investor not only decided to hold the stock 
for a long-term gain, but also decided to try for more potential profits: He rolled the 
call up to a higher striking price. This lets the holding period continue. An in-the­
money write would have suspended it. 
DELIVERING .,.,NEW" STOCK TO AVOID A LARGE LONG· TERM GAIN 
Some covered call writers may not want to deliver the stock that they are using to 
cover the written call, if that call is assigned. For example, if a covered writer were 
writing against stock that had an extremely low cost basis, he might not be willing to 
take the tax consequences of selling that particular stock holding. Thus, the writer of 
a call that is assigned may sometimes wish to buy stock in the open market to deliv­
er against his assignment, rather than deliver the stock he already owns. Recall that 
it is completely in accordance with the Options Clearing Corporation rules for a call 
writer to buy stock in the open market to deliver against an assignment. For tax pur­
poses, the confirmation that the investor receives from his broker for the sale of the 
stock via assignment should clearly specify which particular shares of stock are being 
sold. This is usually accomplished by having the confirmation read "Versus Purchase" 
and listing the purchase date of the stock being sold. This is done to clearly identify 
that the "new" stock, and not the older long-term stock, is being delivered against the 
assignment. The investor must give these instructions to his broker, so that the 
brokerage firm puts the proper notation on the confirmation itself. If the investor 
realizes that his stock might be in danger of being called away and he wants to avail 
himself of this procedure, he should discuss it with his broker beforehand, so that the 
proper procedures can be enacted when the stock is actually called away. 
Example: An investor owns 100 shares ofXYZ and his cost basis, after multiple stock 
splits and stock dividends over the years, is $2 per share. With XYZ at 50, this investor 
decides to sell an XYZ July 50 call for 5 points to bring in some income to his port­
folio. Subsequently, the call is assigned, but the investor does not want to deliver his 
XYZ, which he owns at a cost basis of $2 per share, because he would have to pay cap­
ital gains on a large profit. He may go into the open market and buy another 100 
shares of XYZ at its current market price for delivery against the assignment notice.