Covered Calls

[John Ralls]

On Dec 11, 2013, at 9:57 AM, Steve <zephod at cfl.rr.com> wrote:

> 
> ---- John Ralls <jralls at ceridwen.us> wrote: 
>> 
>> On Dec 11, 2013, at 6:39 AM, Les <lelliott5 at gmail.com> wrote:
>> 
>>> Does anyone know how to handle the sale of covered calls that expire
>>> without being exercised in GC? I am wondering if there is a transaction
>>> needed to close out the expired call. 
>> 
>> Of course you have to close out the expired call. Its value goes to zero, and you need to book the loss. IIRC it goes to short-term cap gains, but it's been a few years since I did covered calls and I don't remember all of the wrinkles.
>> 
>> Regards,
>> John Ralls
> 
> I, too am interested in how to handle options. Covered calls are probably the easiest.
> 
> If you sold the covered call then you receive a premium and if it expires worthless then you get to keep the premium which is a gain not a loss. (I'm sure the OP knows this or they wouldn't be trading option!)
> Should that gain be income or is it capital gains?
> If you bought the call and it expires worthless, then you will have a loss which needs to be booked as John said. 
> 
> If you sold the call and it gets exercised then you will get called out of your stock at the strike price.
> How should the profit/loss be reported.
> 
> For example, say you bought 100 ABC for $10 for a total cost of $1000. ABC goes up to $15 and you sell a covered call for $1 at $15. ABC goes up to $16 and you get called out at $15.
> Your profit an the overall transaction is ((15 - 10) + 1) x 100 = $600.
> Is it possible to get a report that would show that?
> 
> And then there are vertical spreads, calendar spreads, iron condors, etc, etc, etc and you can roll to follwing months etc, etc.

Ah, right. 

For US rules, see http://www.irs.gov/publications/p550/ch04.html#en_US_2012_publink100010618 and following sections. It’s actually wise for any investor to be generally familiar with IRS Pub 550.

Unexercised options are a simple short-term gain or loss. Exercised options affect either the basis or proceeds of the underlying stock, depending on whether you bought or sold the option and whether it’s a put or a call.

So Steve’s example is correct, the $100 you got for the sale of the option is added to the proceeds of the sale of the stock.
In Gnucash I handled that with a split from the option to the stock for 0 shares:
Sell ABC 100 (Called)
                                                      Assets:Broker:Stocks:ABC      -100   15.00              1500.00
                                                      Assets:Broker:Money Market                   1500.00
                                                      Assets:Broker:Options:ABC                     100.00
           Realized Gain/Loss                         Assets:Broker:Stocks:ABC                      500.00
                                                      Income:Taxable:STCG                                      600.00

Les, you should account for the calls in the same way regardless of whether the transaction is in a taxable account; the Income account would just be something like Income:IRA:STCG.

If you’re doing any of the more complicated stuff Steve asked about, hire a CPA or Enrolled Agent (or your country’s equivalent) to guide you. It’s easy to screw this up and get into trouble with the tax folks.

David, no stretching required. As Maf King is fond of saying, you just do in GnuCash exactly what you’d do with paper ledgers.
The lot tracking wizard is barely able to handle simple stock transactions. I don’t use it for that and I sure wouldn’t use it for anything involving options contracts.

Regards,
John Ralls