Chapter 41: Taxes 
TABLE 41-3. 
Tax treatment of trades. 
Short-term capital items: 
July 35 call: Net proceeds ($200 - $25) 
Net cost {expired worthless) 
Short-term capital gain 
October 35 call: Net proceeds ($300 - $25) 
Net cost ($600 + $25) 
Short-term capital loss 
919 
$175 
0 
$175 
$275 
- 625 
($350) 
Long-term capital item: 
100 shares XYZ: Purchased January 2 of one year and sold at January 
expiration of the following year. Therefore, held for 
more than one year, qualifying for long-term treatment. 
Net sale proceeds of stock {assigned call): 
January 40 call sale proceeds 
($400 - $25) 
Sold 1 00 XYZ at 40 strike 
{$4,000 $75) 
Net cost of stock (January 2 trade): 
Bought 100 at 32 {$3,200 + $75) 
Long-term capital gain 
$375 
+ 3,925 
$4,300 
- 3,275 
$1,025 
This example demonstrates an important tax consequence for the covered call 
writer: His optimum scenario tax-wise is a rising market, for he may be able to 
achieve a long-term gain on the underlying stock if he holds it for at least one year, 
while simultaneously subtracting short-term losses from written calls that were 
closed out at higher prices. Unfortunately, in a declining market, the opposite result 
could occur: short-term option gains coupled with the possibility of a long-term loss 
on the underlying stock. There are ways to avoid long-term stock losses, such as buy­
ing a put ( discussed later in the chapter) or going short against the box before the 
stock becomes long-term. However, these maneuvers would interrupt the covered 
writing strategy, which may not be a wise tactic. 
In summary, then, the covered call writer who finds himself with an in-the­
money call written and expiration date drawing near may have several alternatives 
open to him. If the stock is not yet held long-term, he might elect to buy back the 
written call and to write another call whose expiration date is beyond the date 
required for a long-term holding period on the stock. This is apparently what the 
hypothetical investor in the preceding example did with his October 35 call. Since