918 Part VI: Measuring and Trading Volatility 
There is one further rule in connection with qualified calls. Recall that we stat­
ed that the above rules apply only if the stock is not yet held long-term when the call 
is written. If the stock is already long-term when the call is written, then it is consid­
ered long-term when called away, regardless of the position of the striking price when 
the call was written. However, if one sells an in-the-money call on stock already held 
long-term, and then subsequently buys that call back at a loss, the loss on the call 
must be taken as a long-term loss because the stock was long-term. 
Overall, a rising market is the best, taxwise, for the covered call writer. If he 
writes out-of-the-money calls and the stock rises, he could have a short-term loss on 
the calls plus a long-term gain on the stock. 
Example: On January 2nd of a particular year, an investor bought 100 shares of XYZ 
at 32, paying $75 in commissions, and simultaneously wrote a July 35 call for 2 points. 
The July 35 expired worthless, and the investor then wrote an October 35 call for 3 
points. In October, with XYZ at 39, the investor bought back the October 35 call for 
6 points (it was in-the-money) and sold a January 40 call for 4 points. In January, on 
the expiration day, the stock was called away at 40. The investor would have a long­
term capital gain on his stock, because he had held it for more than one year. He 
would also have two short-term capital transactions from the July 35 and October 35 
calls. Tables 41-2 and 41-3 show his net tax treatment from operating this covered 
writing strategy. The option commission on each trade was $25. 
Things have indeed worked out quite well, both profit-wise and tax-wise, for this 
covered call writer. Not only has he made a net profit of $850 from his transactions on 
the stock and options over the period of one year, but he has received very favorable 
tax treatment. He can take a short-term loss of $175 from the combined July and 
October option transactions, and is able to take the $1,025 gain as a long-term gain. 
TABLE 41-2. 
Summary of trades. 
January 2 
July 
October 
January 
Bought 100 XYZ at 32 
Sold 1 July 35 call at 2 
July call expired worthless (XYZ at 32) 
Sold 1 October 35 call at 3 
Bought back October 35 call for 6 points (XYZ at 39) 
Sold 1 January 40 call for 4 points 
(of the following year) 
1 00 XYZ called away at 40