Sale Wash Rules wrote:
> Hi Mark,
> I have a concern/question about options and sale wash rules.
> I have a stock that I have been writing covered calls on.
> The stock has continued to move higher and higher. Rather
> than losing the stock, I have been buying back the calls and
> selling the next higher strike price in the following month
> via spread transactions. Because I am buying back the
> previous call at a loss because the stock has continued to
> move higher, will this loss be disallowed? I still own the
> stock. What strategy should be used when "lattering up"
> your call writing and selling on a particular stock?
> Thank You, Evan
> Hello Evan
> Right upfront let me tell you that I believe I know the tax situation, but am not 100% positive. The best place to find information is in publication 550, available here:
> It probably depends on the strike price you write. If you are writing options that are out of the money (at the time you write them), at the money, or slightly in the money then the loss is allowed. If the options are deeper in the money, then it depends on how far ITM because certain options are not 'qualified covered calls'. Those are the options for which you will not be able to claim a tax deduction. See page 59, column 3, example.
> When laddering up, to me the primary decision is: Do you still want to own the stock? If you allow yourself to be assigned an exercise notice, you will sell your stock and collect the maximum profit available to the covered call writer. If that profit feels insufficient and you prefer to own the stock in an attempt to earn larger profits, then laddering up is a good thing to do.
> There is no 'right' or 'wrong' answer, but when rolling up, I prefer to collect additional cash. That means selling the next higher strike (or sometimes 2nd higher) and I choose to go out as many months as necessary to allow me to roll for a net cash credit (or a small debit is ok. I just don't like paying large debits. Of course, 'large' to me may not feel 'large' to you.)
> When rolling up, I believe any method is reasonable, as long as you recognize that you are passing up the opportunity to lock in a good profit. But if the stock is moving steadily higher and you want to stay with it, then taking in that extra cash provides some comfort if the stock ever reverses direction.
> Mark