A covered call option
is a call option (see Q 7668) written (i.e., granted) by an investor on stock that is owned by the investor or acquired by the investor in connection with the writing of the call option.
This, says Schroders, is achieved through an actively managed portfolio of higher-yielding global property securities and REITs with a covered call option
overlay to enhance the yield.
A naked call option, a covered call option
and a call option that is part of a spread or straddle take on different meanings and values depending upon their particular package/non-package status.
2002-66, the Service held that if a grantor of a qualified covered call option
(QC) holds a put option on the same underlying equity, the purchased put will cause the stock and the QC to be part of a larger straddle and ineligible for the Sec.
In effect, a score is a call option on AT&T and a prime is a covered call option
* When will direct ownership of stock be subject to the tax straddle rules?What is a "qualified covered call option
Therefore, a company writing a covered call option
on an available-for-sale security would include the gain or loss on the option in current earnings, while the loss or gain on the security would be reported in other comprehensive income.
1092(c)(4), a taxpayer holds a qualified covered call option
if the following five factors are met at the time the call option is written: (1) the option is traded on a national securities exchange; (2) the option will not expire for more than 30 days; (3) the option is not deep-in-the-money; (4) the option is not granted by an options dealer; and (5) any gain or loss with respect to the option is not ordinary income or loss.
PROPERTY SUBJECT TO STRADDLE RULES Section 1256 Contracts Non-Section 1256 Property Regulated futures contracts Stock options Nonequity option contracts (see Q 1068) Other equity options (see Q 1067) Foreign currency contracts Direct ownership of stock--but only when Dealer equity options at least one offsetting position is: 1) an option (other than a qualified covered call option
) on such stock or on substantially similar stock or securities; 2) substantially similar property; or 3) stock of certain corporations which take positions that offset positions held by Shareholders (see Q 1078) Forward contracts Other actively traded personal property which is not a Section 1256 contract Securities futures contracts (see Q 1072) 1078.
it seems likely, however, that an investor can look to the concept of a qualified covered call option
Collaring, the process of purchasing a put option while selling a covered call option
, is one important option strategy used to help establish a more highly focused risk/return profile.