Covered Calls

[Les]

On 12/11/2013 01:59 PM, John Ralls wrote:
> 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
>
>
>
>
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Thanks for all the feedback.  I will use the suggestions when ever I
decide to sell the stock.  So far, just selling covered calls against
the stock.
Les