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Author: jperkinsok Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121219  
Subject: Another covered call question Date: 10/19/2001 6:24 PM
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I recently wrote a covered call which expired in the money today. When the shares are called, I will have a net gain in the stock. Does the money I received from selling the call reduce my cost basis, thus increasing my gain? Or, is the call handled as a separate transaction entirely?

In my example, I paid $18 for the stock, then sold $25 calls for $1.25. So do I have one transaction with an overall gain of $8.25 or two separate transactions, one gaining $7 and the other gaining $1.25? I know that the net result is the same, but I want to make certain that I document everything correctly next April.

Thanks in advance for any advice.

Jason
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Author: Charlie48K Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 54712 of 121219
Subject: Re: Another covered call question Date: 10/19/2001 7:25 PM
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You have two separate transactions. You have income from writing a call and no effect on your stock. If it had been exercised, you would still keep them separate. They only thing different would be a sale at the exercise price. The option proceeds would still be separate from the stock transaction.

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Author: zman49 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 54715 of 121219
Subject: Re: Another covered call question Date: 10/19/2001 7:51 PM
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Jason,

Your question is confusing. You indicated you wrote covered calls which expired today in the money today. I think that is extremely unlikely. Call options on equities expire on the Saturday following the third Friday of the month, so the options would not expire today, they would expire Saturday the 20th if they expire. However, the odds of an in the money option contract expiring is very low. I think you will find that the holder of the option exercised it and you will be assigned. If that is correct you will have sold the stock.

If that is correct, the first response you received is incorrect. The correct information, straight from the IRS, is:

If a call you write is exercised and you sell the underlying stock, increase your amount realized on the sale of the stock by the amount you received for the call when figuring your gain or loss. The gain or loss is long term or short term depending on your holding period of the stock.

IRS Publication 550, page 53.

http://ftp.fedworld.gov/pub/irs-pdf/p550.pdf

If you do not receive an assignment Monday, and you still own the stock, you will have only the call to report. It will be a short term capital gain for the $1.25. When you later sell the stock it will still have a cost basis of $18.

If you do receive an assignment, you will a have a cost basis of $18 and proceeds of $26.25 for a single profit of $8.25 per share recorded as a single gain.

By the way, if you are selling covered calls and you do not know how to determine when a covered call is a "qualified covered call" and when it is subject to the IRS "straddle" rules you better read the section on Publication 550 on straddles as well, beginning on page 54.

Good Luck,
Z

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Author: zman49 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 54716 of 121219
Subject: Re: Another covered call question Date: 10/19/2001 7:53 PM
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Charlie48K,

I respectfully disagree with the answer you supplied about how to report an exercised covered call option. Please see my previous post.

Good Luck,
Z

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Author: Charlie48K Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 54718 of 121219
Subject: Re: Another covered call question Date: 10/19/2001 10:02 PM
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Thanks for the correction.

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Author: EGUSC Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 54720 of 121219
Subject: Re: Another covered call question Date: 10/19/2001 10:14 PM
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Zman is 100% correct. If you want to know something about options he is your man.

I am a big fan of writing options, i love those covered calls and naked puts. But, My point is that if you don't understand options and their accounting you should not be writing options contracts. Good luck, U seems to be well on your way to a good understanding.

PS I too always consider my options as expiring at 4:00 on the 3rd Friday. its the same differance

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