37 lines
2.8 KiB
Plaintext
37 lines
2.8 KiB
Plaintext
916 Part VI: Measuring and Trading Volatllity
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Thus, this covered writer has a net gain of $1,125 and it is a long-term gain because
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the stock was held for more than one year (from September 1st of the year in which
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he bought it, to October expiration of the next year, when the stock was called away).
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Note that in a similar situation in which the stock had been held for less than
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one year before being called away, the gain would be short-term.
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Let us now look at the other two rules. They are related in that their differen
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tiation relies on the definition of "too deeply in-the-money." They come into play
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only if the stock was not already held long-term when the call was written. If the writ
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ten call is too deeply in-the-money, it can eliminate the holding period of short-term
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stock. Otherwise, it can suspend it. If the call is in-the-money, but not too deeply in
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the-money, it is referred to as a qualified covered call. There are several rules regard
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ing the determination of whether an in-the-money call is qualified or not. Before
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actually getting to that definition, which is complicated, let us look at two examples
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to show the effect of the call being qualified or not qualified.
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Example: Qualified Covered Write: On March 1st, an investor buys 100 XYZ at 35.
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He holds the stock for 3% months, and, on July 15th, the stock has risen to 43. This
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time he sells an in-the-money call, the October 40 call for 6. By October expiration,
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the stock has declined and the call expires worthless.
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He would now have the following situation: a $575 short-term gain from the
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sale of the call, plus he is long 100 XYZ with a holding period of only 3% months.
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Thus, the sale of the October call suspended his holding period, but did not elimi
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nate it.
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He could now hold the stock for another 8½ months and then sell it as a long
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term item.
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If the stock in this example had stayed above 40 and been called away, the net
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result would have been that the option proceeds would have been added to the stock
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sale price as in previous examples, and the entire net gain would have been short
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term due to the fact that the writing of the qualified covered call had suspended the
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holding period of the stock at 3½ months.
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That example was one of writing a call which was not too deeply in-the-money.
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If, however, one writes a call on stock that is not yet held long-term and the call is too
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deeply in-the-money, then the holding period of the stock is eliminated. That is, if the
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call is subsequently bought back or expires worthless, the stock must then be held for
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another year in order to qualify as a long-term investment. This rule can work to an
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investor's advantage. If one buys stock and it goes down and he is in jeopardy of hav
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ing a long-term loss, but he really does not want to sell the stock, he can sell a call |