Marie Said:

How do I record "Writing a covered call option" in the Yahoo Finance transaction page?

We Answered:

Use negative number of contracts for "Shares" and amount of premium received for "Price Per Share".

Penny Said:

How is premium income from covered call option writing taxed?

We Answered:

In UK, as a 'rule', all investment income is taxed at source (eg Dividends, Interest etc).

Anything else (including any profits made from changes in the value of shares you own) may be assumed to be Capital Gains.

The exception is the proceeds (if any) from gambling eg. spread betting, FOREX trading .. this is tax free (actually, that's not quite true = the bookies do pay tax on your bets)

Since I believe options (calls/puts) are a form of gambling, I would check with your 'bookie' ..

Clifton Said:

Tax issues of covered call writing in large portfolio?

We Answered:

http://www.cra-arc.gc.ca/E/pub/tp/it479r… will give you a headache over this one.

You can always call anonymously to the tax specialists at Canada Customs and Revenue Agency. They will likely put you through to a senior specialist. The number to call is 1-800-959-8281.

If you are not taking the profits out of your investing account, I think you have a strong argument that it's all capital income. If you are removing the profits from this account and taking it as personal income, you might have a problem (or if you do it full time, etc.).

You could always transfer some of the underlying securites that are not written in contracts yet into a SDRSP that allows for covered call writing.

Your annual order numbers are roughly what a few of us do in a month (and some in a week) and we've never had problems. The joys of options...

Like I said, though, call CRA and log who you spoke to and when. You shouldn't lose sleep over this, though.

Hope this helps. Good luck.

Yolanda Said:

In Simple terms what does Covered call writing and purchasing puts/Calls to open mean?

We Answered:

Jeff's answer is accurate and in simple terms, but let me expand a bit on that to be more clear about the difference in risk of the different types of option strategies.

First some definitions:
"Call" = option to buy a stock at a certain price before a certain date
"Put" = option to sell a stock at a certain price before a certain date
"Purchase an option" - you pay a certain amount (the "premium") in order to have the option to buy (if it's a call) or sell (if it's a put) the underlying stock.
"Write an option" - someone else pays you (the "premium") to give them the option to make you sell the stock to them (if it's a call) or buy the stock from them (if it's a put).
"Covered call" - a call option that you write against stock you already own
"Uncovered" or "naked" - an option you write for which you do NOT own the related stock.

Writing covered calls is the safest option strategy because you can't really lose money on the option. If you own the stock and it's at $38 and you sell (write) a covered call against it with a strike price of $40 for a premium of $1 per share, here's what can happen:
1) Stock price goes down - the option expires worthless and you keep the $1 premium. You lost money on the stock, but you gained money on the option so you're still ahead of where you would have been if you hadn't sold the option.
2) Stock price goes up but to something less than $40 - this is the best case for a covered call writer. The option still expires worthless, so you get to keep the $1 premium (a gain) and you also have a small gain on the stock.
3) Stock price goes above $40 and the option is "exercised" - You keep the $1 premium (a gain), the stock is sold for $40. That's less than the current stock price, but still more than the original $38, so you still have a gain on the stock. If the stock price is above $41, it's just not as much of a gain as it could have been had you not sold the option, but it's still a gain.

So as you can see, there's no way to "lose" money by writing a covered call.

If you buy a put or a call, you can lose the entire amount you pay for the option if the stock price doesn't do what you expect in time and the option expires worthless. In this case, you lose money. This is riskier than covered calls because you can lose money, but at least you know how much you can lose (the full amount that you paid for the option).

The riskiest case is writing uncovered/naked calls. Take the earlier example of a $38 stock that you write an uncovered $40 call on for $1 premium. But then the company announces a cure for cancer or that they're being bought by another company or something like that. The stock shoots up to $60. Now the option is exercised and you have to sell the stock for $40, but you don't own the stock, so you have to buy it (at $60) in order to sell it for $40. You lose big here. And what if the stock went up to $80 or $100? The risk is very large writing uncovered calls.

By the way, historically most options expire worthless, so the majority of money in options is made by option sellers, not buyers.

Glenda Said:

can someone explain covered call writing to me?

We Answered:

<<<can someone explain covered call writing to me?>>>

First you need to understand what a stock is and what a call option is. I will assume you know what a stock is. If you do not know what a call option is I suggest you take a few minutes to take the free "options overview" tutorial at

http://www.cboe.com/LearnCenter/Tutorial…

Writing a covered call simply means selling a call option when you own the underlying stock.

<<<do you make money if the stock goes up or if it goes down?>>>

Using a covered call strategy is usually most desirable when the stock does not go up or down very much. If the stock goes down a lot you usually lose a little less money than if you had not sold the covered call. If the stock goes up a lot you make money, but not as much as you would have if you did not write (sell) the call option.

There is a good discussion about writing covered calls at

http://www.cboe.com/Strategies/EquityOpt…

Felicia Said:

Why would I write a covered call that is in the money?

We Answered:

The first sentence in the answer by Califrich was excellent. "If you write an in-the-money call, you will get more premium and more downside protection than you would writing an at-the-money or out-of-the-money call." Of course, you also have a lower maximum profit than you would get writing an at-the-money or out-of-the-money call.

I disagree with Calirich when he says "in fact, that's what you want to happen" refering to assignment. I also disagree with Radar Man when he says "you need the stock to move to the ITM strike price or lower" which is just about the opposite of Calirich.

Let me give you an example of when I think an ITM covered call would be appropriate. Suppose you think a stock's fair value is between $50 and $55 per share, and it is currently trading in that range. If I could sell a covered call with a strike price of $50 for $6.00 (or more) I probably would. If assigned, I would sell the stock for an effective price of $56 per share, more than I think it is worth. If the option expired worthless the stock would be trading under $50 at expiration, less than I think it is worth, and I would not sell it but I would have an extra $600 in the my account from the covered call premium.

I consider the answer by pumpdatiron incorrect. He said "If you wanted to sell the stock anyway, writing a call slightly in the money would bring an extra premium. This way you've sold the stock with an added bonus." That assumes that that the stock will be sold, but if it drops in value it may not be. And if it drops in value very much, your account will have less value than if you had simply sold the stock at the time you sold the covered call.

I will mention one more thing. In the past I have seen some people recommend selling an ITM covered call because they want to keep the stock until it qualifies for the long term capital gains rate. This does not work, since selling an ITM covered call causes the start of the holding period for the stock to change.