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