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Tax Information by Guest Author Owen Sargent, CPA

Tax Time Is Upon Us
First, I strongly urge all BCI members to download IRS Publication 550, Investment Income and Expenses, from the Internal Revenue Service website, at:

 http://www.irs.gov/pub/irs-pdf/p550.pdf.

You will recognize much of the following information when you read it. The page references below refer to the page in the 2009 Publication 550. Throughout this discussion I will refer to capital GAINS on the optimistic assumption that you will not incur a capital LOSS. However, where you read capital gain, generally you may also read it as capital loss, or capital gain/ (loss). 

Second, there are no reporting requirements for retirement account trading, so, if you are only trading in your IRA, most of this discussion does not matter. You just want your account balance to be bigger next month than it was last month. 

Third, some important terms need to be defined: 

Capital Asset (Pub 550 P.49): This is pretty much anything you own and use for personal, pleasure or investment purposes. The term includes such tangible assets as a boat, a coin collection, or a piece of real estate. It may also include intangible assets, such as a patent or copyright. The distinction between a capital asset and a non-capital asset is its use. Pretty much any capital asset becomes a non-capital asset if it is used in a trade or business, or is “for sale” to customers in a trade or business. (See the discussion on pages 49.and 50) Our discussion will be limited to corporate stocks and stock options. 

Capital Gain (Loss) (Pub 550 P.49): A capital gain or loss is simply the difference between the proceeds of the sale and your cost basis of the asset sold. (The IRS has invented something called the “deemed sale” which will be discussed later) If you bought a stock for $25 and sold it for $30, you have a capital gain of $5. You can’t have a capital gain or loss unless you have a sale of a capital asset. However, a sale of an asset does not necessarily mean you have a capital gain or loss. Why… because every capital gain requires two parts of the transaction, a sale AND an acquisition, or purchase. (See Sort Sales below):

Short Sale (Pub 550 P.56): The normal progression of a trade is to buy the security, wait, and then sell it. Well, in the world of Wall Street, you are allowed to do the trade in the reverse. A short sale of a stock is where you borrow shares from your broker and sell them, with the understanding that you will purchase the stock at a future date and return the shares. When you sell a call option, either naked, or covered by shares of the underlying stock, you are opening a short sale. The sale transaction does not constitute income or an adjustment to the basis of the stock. If the call is “bought to close” it becomes a reportable capital gain. If the call option is exercised by the buyer, the option premium becomes part of the stock sale. (See Basis) below. You may be required to report the sale on your tax return as part of a reconciliation to the Schedule D. New reporting requirements will have your broker reporting option sales to the IRS. If you sell a January call option in December, you may have to explain why you are not reporting a gain on the option sale. Make sure your tax preparer understands short sales.

New IRS reporting: For years the Form 1099-B reports covered just the sales of stock and mutual fund shares. Beginning in 2011 these reports will also include your cost basis. It is important that you check your broker statements to be sure that the cost basis of all of your securities is correct. This is going to include securities transferred between brokers and shares you receive as gifts or inheritance. At this time I do not know how a short sale will be reported. When the 2011 forms come out I will put a posting on the blog that week. 

Basis (Pub 550 P.42): Basis is often a moving target. Generally it is what you paid for a stock or option. There are adjustments which may be necessary to report the proper capital gain. These adjustments may include special dividends, stock splits and stock dividends, and some others. I urge you to read the basis discussions in Publication 550. You should also keep an eye on your brokerage account because the IRS is going to assume the broker is providing the correct basis. 

If you write a covered call, and it is exercised, the option premium is added to the proceeds of the sale of the stock. Example: you buy 100 shares of ABC stock for $3,800 and sell the JUL $40 call for $125. If the stock gets called away, the proceeds will be $4,125 ($4,000 + $125), and the basis will be the $3,800 you paid for the stock. The broker probably will report it properly. Just be sure they don’t report the option sale, and then report the stock exercise including the option premium. 

Since this blog is for covered call writers, I will not go into the adjustments for a call purchaser or a put option transactions. If you want to learn about them see Pub 550, Page 58. There is an excellent table for treatment of option transactions. 

Wash Sale (Pub 550 P.56): A wash sale loss is not deductible. A wash sale occurs when you sell a stock for a loss and, within 30 days before or after the trade, buy the same stock, or substantially the same stock. This means that if you sell a stock at $35 for a loss, and buy a $35 call option, you have a wash sale and cannot deduct the loss on the stock. 

Short term vs. Long term (Pub 550 P.53): One of the reasons to keep up to date on the tax rules is because they are subject to change. A Long term gain is currently a gain on a security held for more then one year. If you have owned a stock for more than one year which is called away in an option exercise, the gain is a long term gain. It does not matter if the option was sold day before yesterday. 

Schedule D: It would be wise for you to get a copy of Schedule D for Form 1040, and the instructions. Familiarize yourself with the reporting requirements so you know when the information is correct or does not look right. 

Inherited Stock: The estate tax issue is still being discussed in Washington. At this pint in time, if you inherit stock from someone who died in 2010 you inherit it at the deceased person’s cost basis. If you inherited it before 2010 your cost basis is the average price of the stock on the day the person died. 

If you have a simple question that you think everyone could benefit from, please post a comment on the blog. If you have a question that you would like a more personal answer to you may email me at osargentcpa@aol.com. If you ask too many questions, please send me your name and address so I can send you a bill. Best of luck in your trading.

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Owen Sargent is an outstanding CPA, an attorney and a seasoned stock investor. He helped me develop the Ellman Calculator and is a frequent contributor to the BCI blog forum. If you are in need of a tax advisor I recommend Owen without hesitation.

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Welcome New BCI Members:

It is quite humbling for me to see how many new members this site is attracting. My team and I value each and every one of our fellow Blue Collar Investors. One of our mission statements is to assist each other. At the end of each blog article is a “comments” box where you can ask questions or make statements. We encourage you to do so. Every question or comment from every member is important whether it was asked for the first time or the 100th time; whether it’s basic or advanced.  Responses may be from me (admin), members of my team or other members who are part of our common goal of becoming CEOs of our own money and financial independence. WELCOME AND JOIN IN!

Reminder:

This is the last week of the DVD holiday sale. If you are sending this as a Christmas gift (or purchasing for yourself) it will be shipped via expedited mail at no charge and will arrive in time for the holiday if ordered by December 20th. Premium members  enter the store from your premium site for an additional discount. Link to Blue Collar store:

/store.shtml

New rolling strategies video:

I recently produced a video about expiration Friday rolling strategies based on an article I previously published. With expiration Friday coming up this week I have highlighted this video on our homepage and will continue to do so the week before each expiration Friday. I hope you find it helpful:

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Market tone:

Economic reports continue to point to a slow but palpable recovery:

  • Consumer sentiment improved as consumer borrowing rose $3.4 billion in October, the largest increase since July, 2008.
  • New jobless claims decreased
  • The trade deficit dropped by 13% in October
  • U.S. exports jumped to their highest level in two years. Exports to China rose nearly 30%
  • On a negative note, mortgage rates rose to their highest levels since June due to volatility in the fixed income markets

For the week, the S&P 500 rose 1.3% to a 2-year high of 1240 for a year-to-date return of 13.4%.

This week I constructed a 3-month line chart of the S&P 500 using the same technical indicators we use for 1-month options:

3-month chart of the S&P 500

Note the following technicals:

  • The blue and green arrows show an uptrending S&P 500
  • The short-term moving average is above the longer-term moving average (red arrows)
  • The red circle highlights where the S&P 500 moves above the short term moving average and holds there
  • The blue circle shows a bullish MACD signal
  • The orange arrow shows an ascending stochastic oscillator
  • The green circle highlights that these positive parameters occurred on solid volume

Summary:

IBD: Market in confirmed uptrend

BCI: This site continues to have a moderately bullish market outlook and as a result favor O-T-M strikes in our option sales.

The best in trading to all,

Alan (alan@thebluecollarinvestor.com)

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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

47 Responses to “Tax Information by Guest Author Owen Sargent, CPA”

  1. Dan December 12, 2010 12:31 pm #

    Owen,

    A wonderful article and very timely. Thank you.

    Alan,

    I am a new member and I will take you up on your offer to “join in”.

    On page 61 of Cashing in on Covered calls you state “Since moving averages are ineffective when a security moves in a trading range (sideways movement)……you are less likely to use this indicator in your buy/sell decisions”. My question is: Do we eliminate these patterns from consideration and only chose stocks moving up or do we just handle these stocks in a different manner and if so, how? I hope this question isn’t too basic.

    Thanks.

    Dan

  2. owen December 12, 2010 1:19 pm #

    Dan,

    You will see many comments regarding “indicators” which can be used to help you make a decision. It still all comes down to your best guess as to what a stock is going to do in the next month or two. Many people watch moving averages as an indicator. If a stock comes down, and “bounces off” a moving average, many investors consider it a “floor”. If a stock’s 20 day moving average crosses its 50 day moving average, if a stock falls below its moving average, etc. All of these are used by many as part of their “feeling” for the market.

    When a stock trades in a sideways range many investors don’t know what to do. The short sellers don’t know if it is going to head down or up. The long buyers feel the same way. Actually it can be a good time for covered call writers. You can sell a call very close to your stock purchase price, either in the money or slightly out of the money.

    The ideal stock for BCI covered call writing is one that has a nice gentle rising price. You but the stock, sell a call, wait for the stock to get called away next month. Repeat.

    Keep an ey on the BCI blog. No matter what the subject posted, many comments discuss a particular stock movemen and BCI members fears and bravery. You may gain some confidence in your decision to buy or avoid a particular stock. Also, please feel free to post a question about a stock you think may be a good choice.

    Just remember, the biggest premiums are on the most volatile stocks. Don’t run out and pick one just because you can get a $3.20 premium instead of a $1.60 premium. It’s better to make a meager 1% than it is to lose 50%.

    Best of luck, and welcome to the Blue Collar Investors.

  3. admin December 12, 2010 3:23 pm #

    Dan,

    Great question. Let me add one more comment to Owen’s response. Technical analysis is one of the important tools we use for stock selection, strike selection and exit strategy determination. There is no guarantee that an equity will behave the way the fundamentals and technicals project. However, by selecting only the greatest performing stocks in the strongest industries and adding in common sense factors like earnings reports and diversification (among many others) we are THROWING THE ODDS WELL IN OUR FAVOR. Assuming favorable market conditions, I am more likely to sell an I-T-M strike on a stock in a trading range and an O-T-M strike for an uptrending stock. Oftentimes, I will “ladder” my strikes. If I own 600 shares of a stock in a trading range, I may sell 4 I-T-M and 2 O-T-M. Many of these decisions are based on your personal risk tolerance. I am a conservative investor so when I state what I do, that may or may not apply to you. Welcome to the BCI community and thanks for participating in our blog forum.

    Alan

  4. Phil December 12, 2010 7:17 pm #

    Thank you Owen for the simple, direct explanation fitting perfectly with what makes the B.C.I. so valuable.

    I have a question, I purchased cmg for $252/sh and sold the250 calls $11. Watched the stock trade through 263 and down to $233, at that time I bought back the calls for 2.80/sh, net $8.20 profit. I then, next day sold the $240 calls for $10.60. Do I have it right from a tax reporting? List the $11 minus $2.80 net $8.20 as one transaction and another $252 basis and a sell at $250.60 for a loss of $1.40. This assumes the stock being taken at $240.
    Thanks to you Alan, my loser turned into a winner. Phil

  5. admin December 13, 2010 8:31 am #

    With expiration Friday coming this Friday, I thought you might be interested in a Q&A just posted in the blog commentary by an article I previously published. See comments 46 and 47 at the following link:

    https://www.thebluecollarinvestor.com/blog/rolling-strategies-on-or-near-expiration-friday/comment-page-1/

    Alan

  6. owen December 13, 2010 9:12 am #

    Phil,

    You are correct in your gain (loss) reporting. The $250 call hass an open and close for an $8.20 gain. The stock, if called away, will have a proceeds of $250.60 and cost basis of $252, for a loss of $1.40.

    H&R Block is hiring.

  7. Mark T. December 13, 2010 10:17 am #

    I have been selling a few weekly calls. I had sold AMZN 175 expiring last Friday. It closed at 175.62 so I was expecting it to be assigned but lo and behold it was still there this morning and was over 176. when I sold it again this morning.

    By the way Long Islanders, I moved from LI to Georgia 2 years ago. It is 20 degrees and I am snowed in in the mountains of North Georgia. Starting to question the logic of the move.

    At least the computer works so I can make a plan of what to do on Friday.

  8. owen December 13, 2010 10:44 am #

    Mark,

    Check with your broker immediately. I know Schwab takes a day to update my unrealized gain/losss page, even though my main holdings page shows a different position. You don’t want to be short a call that you have no stock for.

    As for the wisdom of moving to Georgia, we had enough rain yesterday to give us three feet of snow if the temperature was below freezing. And your real estate and income taxes are a bit lower.

  9. Dan December 13, 2010 12:21 pm #

    I want to make sure that I understand the calculations for an in the money option. One of the stocks on this weeks list is ntap and is up 1.50 today to 55.60. If i buy the stock at this price and sell the january 55 option I get 3.00. Next I subtract the .60 and get a profit of 2.40. I deduct the .60 from the price to get a sale price of 55. Next I divide the 2.40/55 = 4.4% return. I plugged the numbers into the calculator to confirm the results. Just want to make sure that my reasoning is accureate.

    Thanks to Owen and Alan for your previous responses.

    Dan

  10. owen December 13, 2010 12:41 pm #

    Your reasoning is accurate. The reason we subtract the intrisic value from both the “profit” and the “cost” is that it pretty much amounts to an immediate return of part of your stock price.

    You paid $55.60, but when you sold the $55 call you got back, as part of the premium, $0.60 of the money you just paid for the stock. In order to be able to really determine what your profit and cost are, and to compare them to other trade possibilities, we go through the adjustment and get the 4.4% return you mentioned above.

    NOTE: This is NOT the capital gain calculation. This calculation is used only to compare trades for possible selection.

  11. Don_B December 13, 2010 12:45 pm #

    On Dan’s #9, please allow me to chime in here. Previously I thought it would be: Dan’s 3.00 minus the .60 = 2.40, a net. But then do 2.40/55.60 = 4.3%. The 55.60 is what you start with, the 2.40 is what you get. Or am I subtracting the 60c twice?

    I have of course been involved in this more than a few times, so this is a matter of importance in understanding to me too.

    Thanx.

    Don B

  12. Don_B December 13, 2010 12:49 pm #

    SLW shows up on the list as having MACD neutral. But somehow it looks different on the charts, depending on whether I am looking at a longer term chart or a shorter term chart. The one-year sure looks different than, say, the 2-day or the intraday.
    When we are analyzing a stock to buy shouldn’t I be giving more credence to the longer term chart than the shorter?
    TIA.
    Don B

  13. owen December 13, 2010 2:25 pm #

    Don_B #11,

    In your comment you say you are starting with $55.60 and $2.40 is what you get. If you subtract the $2.40 from the $55.60 your calculation says you are net out of pocket $53.20. In relaity you are net out of pocket $52.60 ($55.60 – $3.00).

    Let’s say he chooses to sell the $60 call for $1.45. Because this is an out of the money call the entire premium is potential “profit”. You would divide $1.45 by $55.60 and get 2.61%. If you sell the $55 call you have $0.60 of the premium in the money. $3.00 is not his potential “profit”, it’s $2.40. Dividing $2.40 by $55.60 soes not make sense, becuase you have $0.60 extra in your hand. Since we aren’t treating that as part of our “profit”, we treat it as a partial “return of purchase price”, and subtract it from the purchase price. We bought the stock for $55.60 and got $3 for the option, a net out of pocket of $52.60. If we use $2.40 from $55, we get the same out of pocket, $52.60, and we now have a reurn percent (4.36%: $2.40 / $55), for our potential “profit”, that we can reasonably compare to selling the $60 call, or to a covered call trade on FFIV, AAPL, etc.

    Hope this helps.

  14. Don B December 13, 2010 5:22 pm #

    Owen –

    Thanx much, it does indeed help. In effect, I believe I was subtracting that 60c twice. Looks like I may have misread something of Alan’s in the past.
    As you pointed out elsewhere, it does change the percentage for comparison purposes. But for tax reporting, it does not matter, as the numbers are the numbers.

    Don B

  15. Dave R. December 13, 2010 7:30 pm #

    Thanks, much, for your easy to understand and apply summary of this complicated area of US federal income tax law.

    One issue I am facing is determination of basis of stocks and mutual funds from a person who died in a wee morning hour on a Saturday in December 2009. I used the prices posted for the preceding Friday when preparing the state inheritance tax return and plan to do the same for my future sales transactions when computing federal and state income tax due.

  16. owen December 13, 2010 7:41 pm #

    Dave_R #15

    You have the correct basis. The closing price Friday is your inherited basis. Make sure the broker where the shares are currently held has the correct basis showing on the statement.

  17. Fred December 14, 2010 1:59 pm #

    Alan,

    I’m a recent premium member and I’ve been learning the information in the weekly report. How much importance do you put in the column titled “% dividend yield”? Would you favor these stocks over those that do not give dividends?

    Thanks for your help.

    Fred

  18. owen December 14, 2010 2:01 pm #

    One of you has sent me an email that touched on a subject which I did not mention above, and feel that I should.

    TRADERS IN SECURITIES

    First, this is an audit red flag. That is not to say you should avoid it if you qualify, but make sure you get excellent professional advice before you try it.

    The IRS actually has a tax topic discussion (#429) on their website. http://www.irs.gov/taxtopics/tc429.html

    The basics are this: Being a “trader” is a “business”. It means that you can deduct certain expenses as “business” expenses on Schedule C that you would normally deduct as investment expenses on Schedule E. The difference is that the Schedule E deductions usually don’t wind up giving you any benefit.

    To qualify as a trader it must be a substantial source of your income. If you have a $50,000 W2 and $4,500 in trading gains you will not qualify. There are several other requirements which you can read on the Topic 429 page above.

    The only real reason for trying to qualify is being able to deduct expenses such as margin interest, trading research services, etc. The capital gains are still treated as capital gains. I have had one client who qualified and wanted to be treated as such. Since we were not being silly about the expenses we were deducting he has not been audited on the matter.

    Also, creating a business, such as an LLC or an S-corporation is not worth the effort and expense. Both of them would allow you to deduct expenses and then pass through to Schedule E, but both would attract attention because they have no “business” income. The capital gains, dividends and interest would all pass through to your personal returns as capital gains, dividends and interest. You would also have the additional expense of preparing a partnership or corporation income tax return.

  19. owen December 14, 2010 2:14 pm #

    Fred (#17)

    Many of the stocks the we trade covered calls on do not pay a dividend at all. There are several times the dividend issue becomes important.

    If you are trading on a stock during a month the stock goes ex-dividend, (meaning any buyer after that date is not entitled to that dividend payment) one of two things may happen.

    1) You may buy the stock and sell the call, AND be entitled to the dividend, pushing up your total profit on the trade.

    2) You may buy the stock and sell the call, AND the call buyer will exercise the day before the stock goes ex-dividend just so he gets the dividend you thought you would get.

    So, if you were counting on the gain from the call trade, and the dividend payment, you may not get your wish, especially with higher dividend stocks. It does, however, increase the chances that your call may get exercised and you will make the ROO you thought you would.

    http://www.dailyfinance.com , the website that the AOL home page sends you to, if you want to get a quote on a stock, is one place you can see the ex-dividend date.

  20. Fred December 14, 2010 2:27 pm #

    Owen,

    Thanks for the information and the link.

    Fred

  21. admin December 14, 2010 3:31 pm #

    Seacor Holdings (CKH):

    One of our members sent me an email suggesting I check out the price chart of this stock. Take a look at the support the 20-d ema provides for this uptrender. Pricey stock, beautiful chart:

  22. DaveD December 15, 2010 5:06 am #

    Although the market is going up, im seeing allot of stocks showing bearish candlestick patterns…

    Im not sure of what will happen as a result of this, most likely the market just needs to “catch its breathe”…

    Cant wait for expiration friday…

    Shooow meee theee mooneey!

  23. owen December 15, 2010 9:33 am #

    It may also be waiting to see if investors can inherit $5,000,000 or $1,000,000 tax free, and whether the capital gains rate will 15% or 20%.

  24. Barbara December 15, 2010 10:56 am #

    I have several stocks priced above the strike price. When is the best time to buy back the option if I want to keep these stocks?

    Any ideas are appreciated.

    Barbara

  25. owen December 15, 2010 11:27 am #

    Barbara,

    There really isn’t a “best time”. If you can get a good premium on the next month options you want to sell, you should buy back the current option and sell the next one immediately aftwards. You can buy back an outstanding option any time before it is exercised, which generally means expiration Friday at 4:00PM.

    Be careful that the stock still meets the BCI criteria and is not reporting earnings next month. You might also throw the name out here to see if anyone has any opinion about the particular stock or industry.

    You also should consider if the stock may be running out of uphill steam. The last thing you want to do is close out a call at a loss in order to sell next month’s and then have the stock reverse course and turn into an overall loss.

  26. Steve December 15, 2010 11:36 am #

    Owen:

    One of the reasons I started trading cc’s last year was to offset substantial capital gain losses I had in 2008, courtesy of my stockbroker. My understanding of the tax code is that I can carry forward these long term capital gain losses. So, for example I have had short term capital gains in 2009 and 2010 from cc’s. I will not owe any taxes on these gains until I have exhausted the loss carry forward from 2008. And can I carry forward these losses for several years to come until I have exhausted their benefit? I trade in a taxable account. Am I correct? Thanks for all your help.

    Steve

  27. Barbara December 15, 2010 12:00 pm #

    Thank you Owen.

    I’m looking at altr, de, rvbd (if it moves over 35), shoo and tibx.

  28. owen December 15, 2010 12:33 pm #

    Steve,

    Capital loss carryovers continue until you use them up, either against future capital gains or as the $3,000 allowed against other income, or until you die. If you are married, filng a joint return, the losses get carried over until the second death, or to the new spouse’s joint return, etc.

    There is a new wrinkle in the estate tax which I hesitate to discuss, but people should be on the lookout for it. The new estate tax law raises the minimum threshhold to $5 million, but, I believe, eliminates the step-up in basis. We have to wait until the final bills have been voted on. If there is no step-up in basis on the deceased person’s assets, then the capital loss carryover will carry over to the heirs.

    I love Congress. No matter how much they simplify taxes I wind up with more billable hours. Is this a great country, or what?

  29. admin December 15, 2010 1:12 pm #

    Barbara,

    I have all of these in my current portfolio. Use the “what now tab” of the Ellman Calculator when you’re ready to do the rolling calculations.
    Nice work!

    Alan

  30. DaveD December 16, 2010 6:31 am #

    Usualy with 2 days to go I may look for an opporunity to make 1-2% but i am seeing more bearish signs at the moment so its a little too risky… The upside of this is I think we may see some stocks come down to support levels which for some investors will represent a nice buying opportunity,,,

    Oh on the matter of tax, check out ‘OTrader’… Its a great way to make tax time easier…

  31. admin December 16, 2010 7:05 am #

    January contracts- more time value:

    This Friday December contracts expire leaving two more Fridays in December. Since the January contracts expire the third week in January, we have a long 5-week contract. This occurs usually 4 times a year. As a result the time value of the January contracts will be increased and you will see a higher option return if you enter these positions next week. It also means that if you wanted to wait a few days or a week to enter your cc positions, you can still generate a good return. This should not impact our decision to do rolling strategies on equities we want to retain.

    Alan

  32. owen December 16, 2010 12:00 pm #

    Time value = option profit. An extra week of time value gives you a bit more profit. Today is Dec 16. If you wait a week you are looking at Dec 23. Probably not the most opportune time to trade, but who knows.

    REMINDER: If you sell a January call option, AND it is still open at December 31, you do NOT have a capital gain to report in 2010, and you do NOT have a basis adjustment to the stock that you bought to sell that option. You have an OPEN SHORT SALE position. It is no different that having an open long position, other than which side you need to close the transaction.

    When you do your 2011 tax return you will need to report the transaction that closes in January, even if it does not appear on your broker’s 1099 report.

    So, you sell some option contracts, use the money for the holidays, and don’t pay taxes on it until 2012? Is this a great country, or what?

    Happy holidays, and happy trading everyone.

  33. Barbara December 16, 2010 4:42 pm #

    RVBD closed today at 35.25 and I have several 35 contracts. If the stock is trading near 35 tomorrow how do you determine if you need to buy back the option (at what price)?

    Thanks.

    Barbara

  34. owen December 16, 2010 7:44 pm #

    Barbara,

    If you want to sell the January call you have to buy back the Dec call. It is currently around $0.50. It is going to trade with virtually no time premium because tomorrow is expiration Friday. Buy it back at market just to get the trade done. Then sell the January.

    If you let the stock get called, and decide over the weekend that you want to do an RVBD call for january, you have to buy the stock back. There is no reason to sell it and buy it back. You will pay two commissions for nothing. The next earnings report is due Feb 2, so that is not an issue for selling the January calls.

  35. admin December 16, 2010 7:59 pm #

    Barbara,

    A related point: Let’s say BCSI is trading slightly under the $35 strike as 4PM EST approaches tomorrow. For example: it’s 3:55 and the stock is trading @ $34.95. One might be tempted to assume that there is no need to buy back the option and just let it expire. The thinking here is that there will be no share assignment and the January option can be sold next week eliminating one commission. The truth is that many times the stock price can bump up to $35 or beyond in the few minutes after 4PM as the final trades of the day are tallied. The brokerages will automatically sell your shares and collect the commission. Our contracts are no big deal but multiply by thousands and thousands of contracts and it adds up to big bucks for the big boys!

    Alan

  36. admin December 16, 2010 8:08 pm #

    BCSI:

    I know that some of our members have been hanging in there with this stock since it got rocked by two earnings reports (I’m biting my tongue!). This has been a great performer for a long time and has made many of us nice profits. The problem was that market expectations were greater than actual performance and the stock went from $35 to $17…ouch! I have previously written about nurturing a stock that has gapped down by writing O-T-M calls if fundamentals are still in place. This is “technical nullification”, a term I made up where we ignore the temporary price setback for unusual circumstances.

    Today, BCSI was up 7.94% to $29.91 partially due to an analyst increasing guidance:

    http://toolbox.investools.com/graphs/companynews.iedu?articleId=urn:newsml:reuters.com:20101216:nWNAB9454:3&symbols=BCSI

    Although this equity has not been in my portfolio for a while, I have been watching it because I know many of you still own it. Today’s spike in price put a smile on my face.

    Alan

  37. Dirk December 17, 2010 10:33 am #

    @ Barbara
    I too had RVBD in my potfolio and just BTC the Dec 35 call for $0.45
    I bought then the Jan 35 call for $2.35
    If I deduct the BTC it still leaves me with $1.90 profit.
    I bought RVBD for $34.95 but my adjusted basis is now $ 35 because that’s what I would have gotten tomorrow at assignment.
    So $190 for a $3500 investment leaves me with a nice 5.4% profit.
    I am happy! :>)

    Cheers
    Dirk

  38. Dirk December 17, 2010 10:47 am #

    Oooops,
    just after my post here I checked my order status and saw, that I pressed accidentally the “cancel order” button instead of the “place order” button and I thought the confirmation bell was for the accepted order, but it was for confirming my cancellation instead. . .
    I placed another order just a minute ago and, surprise-surprise, the price for the Jan 35 call just went up and I played the bid/ask game and got it sold for $2.50 now instead for $2.35
    That bumps up my profit to 5.8%
    Should not have happened, but it turned out to be good.
    Beginner luck again!

    Cheers
    Dirk

  39. Barbara December 17, 2010 11:03 am #

    Dirk,

    Nice going! I just rolled out also 0n this stock and received a similar return. I also rolled out on soa and shoo and received 3.3% on each of these.

    Happy Friday everybody!

    Barbara

  40. admin December 17, 2010 11:16 am #

    S&P 500 changes:

    After market close today the following stocks will be dropped from this index:

    NYT
    ODP
    EK
    (KG was previously dropped as it was bought out)

    The following will be added:

    CVC
    FFIV
    NFLX
    NFX

    Mutual funds and ETFs tied to this index will be forced to buy/sell these equities and this will have a positive influence on those added and vice-versa.

    Barbara and Dirk….impressive!

    This week’s blog article will focus on the most popular of the strike prices. Should we be using it as much as the average covered call writer? I think not and will explain why.

    Alan

  41. owen December 17, 2010 2:24 pm #

    Finally. Netflix took its own sweet time coming back up for going into the S&P 500. I got whacked for about $1,300 because I sold the NFLX DEC $190 put and bought the Dec $185. I closed out both for a net loss. (I told you the short put spread was not perfect) I did, however, make $1,200 on the AAPL Dec $300 put – Dec $290 put spread, so I am still surviving. (This assumes Steve Jobs does not die before 4:00PM)

  42. owen December 17, 2010 2:32 pm #

    Congress burned the 12:30AM oil and we got our tax bill. For the next two years we keep all the rates we have had and, if you are unlucky enough (and your family is lucky enough) for you to die with more than $5,000,000 your estate will save a bunch of money.

    Trade on BCI, trade on!

  43. DaveD December 18, 2010 2:05 am #

    YGE

    Yes, I will be looking at this stock for december trading… Here is why…

    Funementally its doing ok. Earns a EPS rating of 99. MSN rating of 5. IBD rating suggest this stock is strong,

    Technically this stock impresses me. Maybe others here would think im absolutelycrazy. But, seriously, pull up an 18 month chart. There is super strong support at 10 dollars with 10 points of validation (note the stocks current price is $10.21). Stochastics are turning up . MACD is trending sideways, but still slowly heading north. In addition, last friday this stock completed a bullish engulfing pattern

    Now if we bought this stock now ($10.21) and sold the ITM call (10 dollar strike) for 65 cents we would have a ROO OF 4.4% and downside protection of 2.1%…

    Happy Trading everyone!

    Dave

  44. Barry B December 18, 2010 5:14 pm #

    DaveD (#43),

    Dave…
    I took a look at YGE with a fresh set of eyes. Here are some of my thoughts…
    – Support around the $10 area
    – A down trend line beginning with the Oct 14 swing high (5 touches). The downtrend line combined with support at $10 displays a descending triangle. Historically, this is a down trending pattern.
    – The Bollinger Bands are constricting meaning that there will be a breakout in the near term. That, combined with the descending triangle would indicate a breakdown is likely.
    – The price chart is stacked down, meaning that the price is below the 5EMA, 20EMA, 50SMA, 100EMA, and 200SMA.
    – IBD’s Smart Select Ratings are not all green per the BCI system (3 red, 2 green, and 1 yellow).
    – IBD’s Industry Ranking is 170 out of 197.
    – The MACD is slightly above the signal line and the Slow Stochastics is slightly below it’s signal line.

    So, if you are following a “pure” BCI methodology, it doesn’t meet the systems requirements. The descending triangle chart pattern combined with the constricting Boll Bands would cause me personal worry because I tend to be VERY conservative.

    I wanted to give you another point of view so you can make a better decision.

    Best,

    Barry

  45. Eddie Q March 20, 2012 5:03 pm #

    I have a general question about what type of account would be the most advantageous to trade in, mainly directed to Owen or anyone who feels free to chime in.

    My question is this, If I have $50,000 to invest, which type of account would be the best to trade in, standard trading account or Roth IRA ?

    Here are the facts as I see them STD acct vs. ROTH acct:

    STD Acct

    Pros:
    There are really none that I can think of

    Cons:
    Capital gains ie…15% since all are short term holdings
    Having to track trading info…SCH D tax filing headache

    ROTH Acct

    Pros:
    All earnings are tax exempt !
    Not having to keep track of trades for tax filing

    Cons:
    Only being able to deposit, in my case, $6000 annually, anything more is subject to a 6% annual penalty, till the overage is nullified based on a $6000 yearly deposit allowance. ( If I have my facts straight on this, feel free to correct me if I am in error )

    That being said, it would appear to me, that having an annual profit target of say 36% (3% monthly, not including compounding), one would be able to pay the 6% penalty annually on additional deposit amounts (only having to pay this penalty on deposited amount,not on any earnings), and still come out ahead, instead of having to pay 15% capital gains taxes in a STD account.

    Am I missing something here or do I have my facts straight ?

    Any advice would certainly be welcomed, as I soon will have @ $50,000 I need to put to work somewhere, thinking of splitting it over my wife’s and my ROTH IRA accounts.

  46. Dr Robert J Houchin June 3, 2012 3:22 pm #

    We have some large family trusts.
    Questions

    1. I sell a coverd Call and it expires. 100% of Premium is Distributable Income ?

    2. I sell a coverd Call and it is exercised. Premium is added to the
    the sales price and the trust pays Cap Gains. Is any part of the Premium Distributable Income?

    3. I sell a covered call and buy it back for less than I received. Is the difference distributalbe Income?

    4. I sell a covered call and buy it back for more than I received.
    Ordinary Loss against Income?

    5. I sell a naked put and it expires. Premium is 100% Distributale Income ?

    6. I sell a naked put and it is exercised. I reduce the basis by the premium and distribute nothing? I leave the bais and distribute the Premium ?

    7. I sell a naked put and buy it back for less than I received. Difference is distributalble Income?

    8. I sell a naked put and buy it back for more than I recieved.
    Ordinary Loss against Income?

    • Alan Ellman June 4, 2012 8:59 am #

      Dr. Houchin,

      Here is the response from Owen Sargent, CPA osargentcpa@aol.com):

      Generally, capital gains are not distributable income in a trust. They are simply converting the trust corpus assets from one form to another. Now, that said, if the trust document says that capital gains are distributable income, then they are. You must check the trust document. Many attorneys don’t know that they need to specify this.

      Income tax treatment:

      There is no such thing as distributable capital losses, except for the final year, when the trust closes. Any capital loss carryover is distributed to the beneficiaries on the final K1.

      If the capital gains are distributable income, then, to the extent that there are distributions, a portion of the distribution will be capital gains reported on the beneficiary’s K1.

      If the gains are not distributable, or the distributions are less than the net income of the trust, the trust will have taxable income. The trust will pay the tax. Ordinary income and short term capital gains are taxed at 35% in a trust. Long term gains are maxed at 15%, just as they are on personal returns.

      All income items are calculated as they would be for a personal income tax return. This includes capital gains and losses. There is a Form 1041 Schedule D.

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