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Imagine that an investor owns 500 shares of the XYZ stock with a current value of 50 and a cost basis of 30. He then sells 5 call contracts with a strike of 65 for 2 dollars. Latter he buys back the calls for 3 dollars. I think we agree that this is a qualified covered call and therefore when be buys the call back he can deduct the loss.

Now, consider this situation. An investor owns 475 shares of the XYZ stock with a current value of 50 and a cost basis of 30. He then sells 5 call contracts with a strike of 65 for 2 dollars. Latter he buys back the calls for 3 dollars. Is this a qualified covered call? Does the straddle loss limit rule apply?

Note: I live in the United States.

Bob

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    The issue is the wording of your question. In the first paragraph, you stated that the investor owned 500 shares and sold 5 calls. In your second paragraph, you wrote that he "owns 475 shares of the XYZ stock... and he then sells a call with a strike of 65 for 2 dollars". To me, "a" call is ONE call, even more so since you did not write "and he then sells '5 CALLS' with a strike of 65 for 2 dollars". So now it's that you meant long 475 shares and short 5 calls? (posted this in wrong place - it's a reply to your comment below). – Bob Baerker May 20 '18 at 23:41
  • @Bob Baerker I see your point and you are 100% right. I meant 5 short calls. I will update my post. – Bob May 21 '18 at 0:09
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As I understand it, an OTM covered calls is not an offsetting position and therefore it has no effect on the status of stock. It is considered a qualified covered call (QCC).

The rules for QCC apply to writing ITM calls. In general, the call must have more than 30 days until expiration and the strike cannot be lower than the strike immediately below the closing price of the stock on the day before you write the covered call.

However, if the short call has more than 90 days until expiration then the limits of the rule varies based on the time until expiration and the price of the underlying (Google for details).

Don't take my word for it. Check with a professional or use a professional tax accounting program.

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  • I agree with what you wrote but there is another issue. The calls in the second example are not covered because the investor does not have 500 shares of stock. Does that matter? – Bob May 20 '18 at 23:08

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