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