I'm experimenting with short strangles and have what is probably a very basic question, but can't seem to confirm what I believe to be the answer. If I sell a call and own the underlying shares, are those shares liquidated if the call option is exercised, or will I be assigned a short position in the stock? I'm assuming my shares would be liquidated. The reason I'm asking is that I have long-term gains in the stock that I want to preserve, but want to enter into short-term short strangles to play sideways movement. I entered a short strangle recently and the stock price was hovering too close to the call strike price on expiration date for me to be comfortable with having my long shares sold (and long-term gains realized), so I closed out the call for a small loss. It would have been acceptable to me to hold on to the call and taking a small loss if the option was exercised through assignment of short shares, but wanted to avoid my long shares being sold. Is there any way to avoid your shares being liquidated if you sell a call option and it is exercised? Can you specify that you want to have short shares assigned instead?
Maybe this will help. https://www.fidelity.com/learning-c...-covered-calls/tax-implications-covered-calls
Thank you for directing me to the info. Wow - I never realized how convoluted the tax implications of options were! But I enjoy learning about this stuff. I can read about trading strategies and other topics until the cows come home, but to actually understand, I find that I have to actually try stuff out and learn from trial and error. My trials are with small amounts of money so that my errors aren't too costly. From what I am gathering I wrote/sold a non-qualified covered call (it was less than 30 days to expiration), which means that my holding period started over once I closed that call position? My long stock position is less than 100 shares, but I'm guessing that doesn't matter in regards to the covered call. Well live and learn I guess. It seems that trading on sideways movement through short-term (less than 30 days to expiration) short strangles should not be taken on positions for which I want to preserve long-term capital gains.
I believe your holding period is only paused, not reset. That is you don't necessarily have to realize your gains and then start over. Have a look here at the section "Exception for certain closed transactions" under "Constructive Sales of Appreciated Financial Positions." IB allows you to buy stock with T+1 settlement so that you can prevent existing positions from being called away: https://www.interactivebrokers.com/en/index.php?f=13437
No you won't have a choice. When you get assigned, all the shares that you have will be sold first to satisfy your obligation as a call seller and then if the number of shares that you own is not enough to satisfy all the short call obligation, you would be short for the number of shares that you didn't own but still needed to be sold for the assignment. They won't leave your existing shares intact and let you go into a short position for the assignment. For example, if you sold 1 call contract which is for 100 shares and you own 60 shares of the underlying. If the call is exercised against you, your 60 shares would be first sold and then you would be in a short position for the remaining 40 shares. They won't let you be in a short position for the entire 100 shares and still let you keep the 60 shares that you owned.
Thanks for the responses. After reading some more I'm thinking that my holding period actually did not start over once I closed my covered call position. The covered call I wrote was out-of-the-money (as would be the case for a short strangle) and therefore qualified, which should not have reset my holding period. It seems the holding period is only reset for non-qualified covered calls which would be calls written in-the-money by more than 1 strike price from the previous days close and which expire in less than 30 days. In regards to what elt894 mentioned buying stock with T+1 settlement to avoid preventing existing positions being called away - it states that you can "Tag US stock shares for early settlement, allowing you to purchase shares after the assignment notice and still have these new shares in your account before the option assignment settles." Does this mean that you submit a buy order but it isn't filled unless the option is assigned/exercised? If this is not the case, why not just submit a traditional buy order for the shares needed (with a last-in-first-out tax designation) to cover the contingency of the option being exercised/assigned? Does anyone have experience purchasing shares with the T+1 stock settlement to "purchase replacement shares to use against an assignment and potentially preclude capital gains and a higher tax liability" as stated here? https://www.interactivebrokers.com/en/index.php?f=13437 Thanks again for helping a newbie trying to wrap his head around all of this.
There are no contingent orders. You would place the T+1 order after you receive the assignment notification. By placing the order on the T+1 exchangin, you are tagging these new shares for early settlement. Suppose you get assigned Monday after the close. Even though your account will show the shares as having been sold, they don't actually get delivered until Wednesday. On Tuesday you make a T+1 purchase and receive those shares on Wednesday. You specify that these shares are the ones used to settle your options assignment rather than your older shares. It's a bit unclear to me whether that specification is made automatically or whether you have to use the tax optimizer tool or contact them. I did it once and contacted them about it, but I didn't get a clear response, and it wasn't big enough to be worth following up more.
Non-standard settlement trades are "generally" an easy do. They are usually not price protected, but double check that with your broker. They might be able to get it done on an ECN or pool where they will get protected. Almost always done for option exercise - as in your case, or some other corporate action. Trading floors will make you "pay up" to get the trade done and it may require "special handling charges. Confirm all of that with your broker. Don't assume your broker will automatically deliver the correct shares - make sure you advise them to deliver the correct shares.
Why not just exit or roll the option and avoid the stock change if that is your goal. Why do you have to wait until expiration?