Hi Mark,

Our club owned 100 shares of MCD and (partly for the educational value) sold a March 2009 covered call (strike price of 52.50).  This past Friday, March 20 (the expiration
date), the option expired and since MCD was a little higher than 52.50, the stock was sold.

My question is more of an accounting question. I was under the impression that our cost basis of MCD would be reduced by the proceeds we received for the covered call. However, I don't see where Bivio did this.  (There's a great chance I handled the transaction incorrectly).

Our broker is Scottrade and those transactions are automatically downloaded to Bivio; the sale of MCD was downloaded. However, no transaction related to when the
option was exercised was downloaded.

Please advise and thanks for your help!!

David Sacks
Treasurer
Old Bay Investors

David,

When you write covered calls, there are two possibilities:

1) The option expires worthless.  In this scenario, you have a short-term capital gain.  Expiration day (Saturday) is the day you repurchase your short option at a price of zero.

2) You are assigned an exercise notice.  Your cost basis is NOT reduced.  Instead, your sale price is increased.  Thus, you sold your shares @ 52.50 PLUS the option pemium you collected.  In this scenario, you no longer report the option trade to the IRS.  The option portion of the transaction is combined with the stock transaction because you report the higher selling price.

Does that make sense to you?

By the way, I have no control over how bivio handles your books, but I have every confidence that they do it correctly.

--
Mark D. Wolfinger
The Rookie's Guide to Options:
The Beginner's Handbook of Trading Equity Options
website:  http://www.mdwoptions.com
blog: http://blog.mdwoptions.com/options_for_rookies
Free eBook: http://www.mdwoptions.com/freebook.pdf