If an investor holds a stock with a low (or unknown) tax basis, the assignment of these shares may be very very costly, if the stock is held in a taxable account because the assignment is a taxable sale. Is there any way an investor can offer substitute stock, perhaps through options, and identify to the broker the new higher basis stock be sold and preserve the low cost basis stock. How do investors handle early (and sometimes uknown in advance) assignments?? In straight stock sales, investors can specifically identify stock or mutual fund shares sold to the broker prior to the sale for tax planning purposes. Can this technique be somehow adapted to covered call strategies? Thanks for any help. Tom
I am not sure what exactly are you saying. To adjust the naked call you can do three things: you can simply buy it back (buy to close) 2: move it up in price by closing the current contract and opening the higher priced call contract (sell to open) and 3rd: you can always roll the current contract to the next month at the higher price (a lot of times for even money) and the easiest way to replicate your current position and still sell calls on it is by buying the call in the money and selling the call out of the money. I hope I have helped here (Remember there is 100s of ways to apply options strategies)
If you hold only appreciated shares, you can't write a covered call, get assigned and then buy shares to fulfill the assignment. A short option isn't likely to be assigned if there's time premium remaining - but that's no guarantee it won't happen. The only sure fire way to avoid assignment on writes on appreciated stock is don't write covered calls I use IB. They offer one the option of selecting "Liquidate Last." I would assume that applies to assignment but I don't know. If you already have high and low cost basis shares, the best thing to do is to check with your broker to determine their policy.
Covered calls is a loser's game. Stocks can surge more than you may think, yet your downside risk is huge (almost as big as the stock, you only get the modest premium you got for the call to offset your loses). Why don't you just collar stocks?
Schwab has a counterpart to IB liquidate last and it does apply to assignments. Unfortunately there is no lag time between an assignment notice and the assignment to purchase subsititute shares at a higher cost basis. Spreads do not seem to qualify. The tax impact for collars can be worse..the collar can trigger a constructive sale even though there is no assignment. Comon guys, there are a lot of buy and hold investors out there that need ur help making 5% a week selling covered calls
Tom, I don't have any specific advise, but if you have a low or unknown (and thus $0 to the IRS) cost basis, selling the shares will also generate a large tax bill. And you would have to sell them at some point to ever really benefit (other then on paper) from the gain on the stock. The only thing is you might have more control over when they are sold then. I'm just noting that the tax bill isn't higher because of the Covered Call or anything - it's just the nature of having a nice gain on the stock in the first place. JJacksET4
Tom, 1) Yes you can substitute stock. When you know your going to be assigned and you do NOT want to repurchase the options written, takes these steps (but make sure your broker can do what you need) a) Buy stock for one day settlement. That may cost a small extra fee per share. b) Notify your broker that you want these newly purchased shares to be delivered - when assigned on ITM calls. 2) If assigned early, do the same thing. If you receive an exercise notice on Tuesday morning, buy shares for 1-day settlement that same day (and go ahead and write new covered calls, if you so desire). The shares will settle Wednesday and you can deliver them to the call exerciser. But ONLY if your broker doesn't screw this up for you. Verify with them in advance that they can accommodate your needs. Some discount brokers probably have no way to do this, so verify with someone senior - not just the customer service rep. Mark http://www.expiringmonthly.com/