How to report on the actual income from an ITM buy write option?

Question

To generate income I sometimes would do in-the-money (ITM) buy/write transactions. An example: On August 21 I bought 3100 ORCL at $116.14 for $360,034. I simultaneously sold 31 ORCL Sept. 22 $110 calls for $9.19 a piece. The final cost is $331,545. The idea is that ORCL will be trading above $119.19 and the options will be assigned. I will sell the shares for $110 a piece pocketing the difference of $9,455.

Quicken downloads the two transactions from the broker and correctly reflects them in the register. When I'm trying to report on the income generated, Quicken reports the proceeds from selling the options of $28,473 ($9.19 x 3100 - $16 commission). Does anyone know how to adjust that for the options assignment and selling ORCL at a loss for $110?

If the options are not assigned, then there's no issue as I keep the entire options premium with an unrealized loss reflected in the ORCL holding. (Then I can sell more covered calls, but those transactions are correctly reported as a short sell).

Many thanks in advance.

Vlad Kaplan · Answer

Thank you, Tom. I'm less worried about the tax reporting as most of the trades are in the tax deferred accounts. Besides, my broker would report any taxable income on the 1099B and separate the long and the short term gains. I was just looking for a way to track income generated from options trading to gauge the performance, etc.

Generally, Quicken is good enough to report on investments as long as you choose the right edition. I realize that deep ITM covered calls are not very common, so will use Excel, no big deal.

Tom Young · Answer

Yes, and that's exactly correct, for taxes.  It's all capital gain, including income from options.  But when you write a call and the call is exercised the term of the stock is the term used for reporting.  So if you wrote a covered call on stock you'd owned for over a year and the call was exercised, it would all be "long term capital gain."

Here's Schwab's summary of this:

The capital gain or loss is treated as short- or long-term depending on your holding period for the stock. •	The amount you received for writing the option is added to the amount received from the sale of the stock.

Vlad Kaplan · Answer

I see your point, but wouldn't the proceeds in that case be reported as capital gains vs. income from options?