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?
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).
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.