Dr. Alan Ellman | Jul 09, 2017 01:44AM ET
Covered call writing is a short-term strategy where we sell Blue Collar store and free to premium members). Please check with your tax advisor before taking any tax-related actions in your brokerage accounts.
A 1-month option is sold against a long-term holding and is bought back or expires worthless
The information is entered in the blue cells of Code D3 of the Elite version of the Ellman Calculator:
Sell Option/Buy Back Option
The options are sold for $450.00 per contract on 2/19/17. This is the sale date. Notice that the acquisition dates (3/18/17) are later than the sale dates. If the options expired worthless, the acquisition date would be the expiration date and the cost basis would be $0.00. In the top row, the option is bought back for $250.00 (resulting in a credit) and in the second row for $550.00 (resulting in a debit). Once the blue cells are populated, the white cells on the right side of the spreadsheet will become populated:
Code D3: Selling and Buying Back an Option
Code D3: Close-up View
Notice that the column to the far right (top blue arrow) shows “S” representing short-term capital gains (losses). These returns are stated as dollar amounts, percentiles and annualized percentiles.
A 1-month option is sold against a long-term holding and is exercised resulting in sale of the shares (short-term holding also shown)
The information is entered in the blue cells of Code D2 of the Elite version of the Ellman Calculator:
Code D2: Option Exercised on a Long-Term Holding
The top row reflects shares purchased on 3/18/15 for $45.00 per share representing a long-term holding. The second row reflects shares purchased on 12/19/16 for $69.50 per share resulting in a classification of a short-term holding. Both options were sold on 12/19/16 and were exercised on 1/20/17. Once the blue cells are populated, the white cells on the right side of the spreadsheet will show the calculations:
Option Exercise of Short and Long-Term Holdings
In both cases, the option premium is incorporated into the stock sale. The shares purchased in 2015 (brown row) will result in a long-term capital gain while those bought in 2016 (yellow row) will result in a short-term capital gain. These returns are stated as dollar amounts, percentiles and annualized percentiles.
Discussion
Covered call writing is generally a short-term strategy that will result in short-term capital gains (losses) when trading in non-sheltered accounts. One exception to this rule is when the option is exercised on shares held for more than 1 year and 1 day in which case the resulting profits (losses) are long-term as the option premiums are incorporated into the stock sale.
Market tone
Global stocks declined this week, constrained by rising bond yields. The yield on the US 10-year Treasury note rose 10 basis points on the week to 2.39%, while the price of West Texas Intermediate crude oil declined modestly to $44.50 a barrel from $45.40 a week ago. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), rose to 11.19 from 10.9 last week. This week’s economic and international news of importance:
Mon, July 10th
China Consumer and wholesale inflation report
Wed, July 12th
United Kingdom: Employment report
Eurozone: Industrial production
Canada: Bank of Canada rate-setting meeting
United States: Yellen House Financial Services Committee testimony
Thu, July 13th
United States: Yellen Senate Banking Committee testimony
Fri, July 14th
United States: Retail sales/Consumer Price Index/industrial production
Summary
IBD: Uptrend under pressure
GMI : 2/6- Buy signal since market close of April 21, 2017
BCI: I am fully invested in the stock portion of my portfolio currently holding an equal number of in-the-money and out-of-the-money strikes. A good jobs report and a rebound in the tech sector on Friday were positives but my defensive portfolio mix remains the same.
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a neutral outlook. In the past six months, the S&P 500 was up 7% while the VIX (11.19) moved down by 2.5%.
Much success to all,
Alan and the BCI team
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