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I own various shares that I want to start writing covered calls on but I've heard about differences between "qualified" and "unqualified" covered calls. What's the difference? All I can find is that qualified calls are out of money when written and unqualified are in the money when written and that unqualified covered calls reset the holding period for your stock. Are there any other differences? If I write an out of money covered call and it gets assigned, and I've held the stock for more than a year, my gain from the stock (not the option premium just the stock) is still a long term gain?

  • The point is that it doesn't make sense to treat you as an owner when you sold a deep in the money option. Selling a deep in the money call option starts to look like a forward-contract sale. It's deep in the money so the assumption is that you sold it, therefore you shouldn't be treated as the owner. Economically, you are largely insulated from the movement of the stock and you'll soon not be the owner except in the unlikely event it falls below the deep-money-call strike. You sold most of the pain and all the gain, so why treat you as an owner? So CG & Divs are not paid to a true owner. – NL7 Apr 19 '14 at 20:34
  • Also note that §1092 straddles, aside from suspending your holding period and disqualifying your dividends can also block taking losses. – NL7 Apr 19 '14 at 20:36
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Yes, as long as you write a call against your stock with a strike price greater than or equal to the previous day's closing price, with 30 or more days till expiration there will be no effect on the holding period of your stock.

Like you mentioned, unqualified covered calls suspend the holding period of your stock. For example you sell a deep in the money call (sometimes called the last write) on a stock you have held for 5 years, the covered call is classified as unqualified, the holding period is suspended and the gain or loss on the stock will be treated as short-term.

Selling out of the money calls or trading in an IRA account keeps things simple.

The details below have been summarized from an article I found at investorsguide.com. The article also talks about the implications of rolling a call forward and tax situations where it may be advantageous to write unqualified covered calls (basically when you have a large deferred long term loss).

http://www.investorguide.com/article/12618/qualified-covered-calls-special-rules-wo/

Two criterion must be met for a covered call to be considered a qualified covered call (QCC).
1) days to expiration must be greater than 30

2) strike price must be greater than or equal to the first available in the money strike price below the previous day's closing price for a particular stock. Additionally, if the previous day's closing price is $25 or less, the strike price of the call being sold must be greater than 85% of yesterday's closing price.

2a) If the previous day's closing price is greater than 60.01 and less than or equal to $150, days to expiration is between 60-90, as long as the strike price of the call is greater than 85% of the previous days close and less than 10 points in the money, you can write a covered call two strikes in the money

2c) If the previous day's closing price is greater than $150 and days till expiration is greater than 90, you can write a covered call two strikes in the money.

  • So as long as I just write otm calls with more than 30 days to expiration I should be fine to keep my long term cap gains. thanks! – Michael A Apr 18 '14 at 21:35
  • Solid answer, but your example about holding period suspending is incorrect. Holding period only suspends if stock isn't at long term yet. The consequence for both long and short term held stock is loss deferral rules that block taking loses on call option writing if you hold underlying stock into next year. See irs.gov/publications/p550#en_US_2017_publink100010666 – UsAaR33 Sep 27 '18 at 5:37

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