Options for the Beginner and Beyond: Unlock the Opportunities and Minimize the Risks

Qualified Covered Calls

Because our interest is to defer taking profit in the stock until the next year, it is assumed that any covered call will have an expiration date in January or later. For our purposes, we follow the IRS guidelines for a qualified covered call that is sold when there are at least 31 days before it expires, but not more than 90 days until it expires.

The basic IRS rule is that you can only drop down to the first strike price level below a certain specified stock price. The specified stock price is the closing price of the stock on the day before the covered call transaction is to be initiated, provided that the stock does not open more than 10 percent higher on the day planned for the transaction. If the stock does open ...