October 21, 2004
Updated January 12, 2005
The American Jobs Creation
Act of 2004 does not alter the definition of a qualified covered
call, but it does change the holding period rules both for individuals
trying to capture qualified dividend income, for corporations
trying to capture the dividends received deduction, and for all
investors trying to age a position to long-term. Under the Act, only qualified covered calls
that are not in-the-money may be written without affecting
the holding period. If
the investor sells an in-the-money call, the holding period on the
stock is suspended.
The Treasury defined "qualified covered calls" in its
2002 regulations. Under those regulations, most calls will
constitute QCCs if they meet two basic conditions:
1. When the investor enters into the call, the call must have more
than 30 days remaining to expiration but not more than 33 months.
2. The call must have a minimum strike price. The
calculation of minimum strike price is somewhat complex. For
more information, see Minimum Strike Prices For
QCCs: How Much
Protection Is "Too Much"?
This
article and other articles are provided for
information purposes only. They are not intended to be
an offer to engage in any securities transactions or to
provide specific financial, legal or tax advice. Articles
may have been rendered partly inaccurate by events that have
occurred since publication. Investors should consult
their advisers before acting on any topics discussed herein.
Options involve risk
and are not suitable for all
investors. Before engaging in an options
transaction, investors must review the booklet "Characteristics
and Risks of Standardized Options".
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