Chapter 41: Taxes 917 
that is too deeply in-the-money (if one exists), and eliminate the holding period on 
the stock 
Qualified Covered Call. The preceding examples and discussion summa­
rize the covered writing rules. Let us now look at what is a qualified covered call. 
The following rules are the literal interpretation. Most investors work from 
tables that are built from these rules. Such a table may be found in Appendix E. 
(Be aware that these rules may change, and consult a tax advisor for the latest 
figures.) A covered call is qualified if: 
1. the option has more than 30 days of life remaining when it is written, and 
2. the strike of the written call is not lower than the following benchmarks: 
a. First determine the applicable stock price (ASP). That is normally the closing 
price of the stock on the previous day. However, if the stock opens more than 
ll0% higher than its previous close, then the applicable stock price is that 
higher opening. 
b. If the ASP is less than $25, then the benchmark strike is 85% of ASP. So any 
call written with a strike lower than 85% of ASP would not be qualified. (For 
example, if the stock was at 12 and one wrote a call with a striking price of 10, 
it would not be qualified- it is too deeply in-the-money.) 
c. If the ASP is between 25.13 and 60, then the benchmark is the next lowest 
strike. Thus, if the stock were at 39 and one wrote a call with a strike of 35, it 
would be qualified. 
d. If the ASP is greater than 60 and not higher than 150, and the call has more 
than 90 days of life remaining, the benchmark is two strikes below the ASP. 
There is a further condition here that the benchmark cannot be more than 10 
points lower than the ASP. Thus, if a stock is trading at 90, one could write a 
call with a strike of 80 as long as the call had more than 90 days remaining 
until expiration, and still be qualified. 
e. If the ASP is greater than 150 and the call has more than 90 days of life remain­
ing, the benchmark is two strikes below the ASP. Thus, if there are 10-point 
striking price intervals, then one could write a call that was 20 points in-the­
money and still be qualified. Of course, if there are 5-point intervals, then one 
could not write a call deeper than 10 points in-the-money and still be qualified. 
These rules are complicated. That is why they are summarized in Appendix E. 
In addition, they are always subject to change, so if an investor is considering writing 
an in-the-money covered call against stock that is still short-term in nature, he should 
check with his tax advisor and/or broker to determine whether the in-the-money call 
is qualified or not.