Assumptions:

Assume that an investor sells 10 Apple Computer listed

calls with a strike price of 150 expiring in Jan 2010 for

$46,700 when the stock is trading at $156.34 on

October 1, 2007. In the first part of this article, to keep this

article as simple as possible, we are assuming the investor

holds no stock or ESOs. Assume also that he holds this

position until the listed calls expire.

Stock Unchanged

If the stock is unchanged, he will be assigned the

exercise notice and will be now short 1000 shares of

stock. Had he covered the sale (write) of the Jan 2010

calls right before they expired, he would have a profit

of of $40,360 which is short term capital gain when

covered.

If he buys the stock back at $156.34 immediately

after the assignment, again the gain is $40,360, which

is short term capital gain .

If he stays short, he will have made the $40,360 without

any immediate tax. If he then buys 13 slightly in the

money Jan 2011 listed calls, he still has not created a

tax bill. Although his two positions do indeed offset each

other, they are not "substantially identical" for the

Constructive Sale Rule Section 1259.

But there must be concern here because the amount

of value that an investor pays for the Jan 2010 calls considers

that the short seller gets the use of the proceeds of the

sale, which unless he is are a market maker or very large

trader he does not get. However in times of practically

" near zero" interest rate, the lost value is very small. Still

the investor should be looking for opportunities to buy that

stock back in whole or part and hedge that purchase if

desired. If the investor has accumulated substantial capital

losses that he can take he may wish to cover the stock

position and take the gain.

Stock Advances

If the stock goes up substantially after expiration and

assignment, the purchase of the stock should be made

in order to eliminate the short stock position because there is

no tax advantage to holding the position. His decision as to

whether to sell calls against the closing purchase depends on

the grantee's willingness to continue to be short or not.

If the stock instead of staying the same after the

2.3 years, went to 220 prior to expiration, the written calls

would be worth $70,000 giving a $23,300 loss, which

can be deducted as a short term capital loss if covered.

If the options are assigned, the investor should buy the

short stock back immediately and sell other calls if he

wish to remain short deltas. This would not be a Wash Sale

under IRS Section 1091, since the calls sold would not be

"substantially identical" with the purchase of the stock.



John Olagues