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