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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: of 121106  
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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