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Author: mbangs Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121182  
Subject: Call option writing Tax Issues? Date: 6/7/2001 1:02 PM
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I am considering writing an uncovered call in my taxable account for stock which I hold in my IRA. What are the tax implications of this if the option is exercised? I understand I will be short the position in my taxable account but my IRA position will be long. What effect does this have on my taxes, taxable account basis etc? Is there any available source of info on this strategy?
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Author: FoolishKenFool One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51634 of 121182
Subject: Re: Call option writing Tax Issues? Date: 6/8/2001 9:44 AM
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I am not sure on the tax issues regarding this strategy, but why not write a covered call from your IRA. If you have a self directed IRA, then most brokers will let you write covered calls. Just a thought.

Good Luck

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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: 51642 of 121182
Subject: Re: Call option writing Tax Issues? Date: 6/8/2001 4:36 PM
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I am considering writing an uncovered call in my taxable account for stock which I hold in my IRA. What are the tax implications of this if the option is exercised? I understand I will be short the position in my taxable account but my IRA position will be long. What effect does this have on my taxes, taxable account basis etc? Is there any available source of info on this strategy?

I am far from sure of this, but I believe you would be setting yourself up for a "no-win" tax situation.

As I understand the IRS "straddle" rules, your IRA account would be a "related party" so, given that you are establishing offsetting positions, the straddle rules would apply. If I am correct in that understanding, the following are possible:

(1) The options expires worthess or you buy it back for less than you received for it: you would have a taxable short term capital gain.

(2) You buy back the option for a loss: You would have a capital loss. You could only recognize the part of the loss, if any, that was greater than any gain you had in the stock that was in your IRA on December 31. If you could claim a loss, and you had held the stock in your IRA for over a year prior to selling the call, the loss would be a long-term loss instead of a short term loss.

(3) The option is exercised: This would cause you to short the stock, as you noted. Selling a stock short does not create a taxable event. Instead you would have opened a short position which, if closed for a profit, would create a short term capital gain at that time. If closed for a loss, your ability to recognize the loss would be limited in the same way you ability to recognize a simple loss on the option would be limited.

IMHO, the most learned tax advisors on the board, such as Phil and Roy, are not very comfortable addressing questions involving options. I would suggest you try repeating this question on the message board at

www.fairmark.com

The source for most of my information is IRS Publication 550, at

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

Good Luck,
Z

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Author: terryfool48 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 51690 of 121182
Subject: Re: Call option writing Tax Issues? Date: 6/10/2001 12:59 PM
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i am very interested in writing covered calls. i would use
my ira and already have covered call option with ameritrade
can you recommend a book or article which would explain
how to use this option in a fooolish way. i think i am in
a perfect position to avoid tax liabilities, so that is not
a concern.

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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: 51706 of 121182
Subject: Re: Call option writing Tax Issues? Date: 6/10/2001 7:08 PM
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terryfool48,

I do not think there is a Foolish way to write covered calls because the Fools do not consider option trading to be appropriate for investors.

The subject of covered calls has been debated regularly on the "Options - You Make the Call" message board if you want to take some time and search through it. As a starting point I would suggest

http://boards.fool.com/Message.asp?mid=13022551&sort=recommendations

which is the most recommended post from that board.

I also suggest you read the article at

http://www.cob.vt.edu/finance/faculty/dmc/derivs/Essay34.pdf

which I believe supplies a realistic view of writing covered calls.

I will say that I do write some covered calls, but I do not do so often. IMHO the disadvantages usually, but not always, outweigh the advantages of the strategy.

Good Luck,
Z

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