What's the best way to record covered calls?

Stuart Boyle

So I've recently started selling covered calls and am wondering if the standard response of recording a short sale transaction and then reporting the covered short later is just not worth the trouble. The problem is that selling a call is not the same as selling shares short. Its causing these artificial fluctuations in the value of my portfolio. What about just booking the premium as income and then if the call is exercised, then record the sale. Thoughts?

This is what I'm getting through the download. I'm inclined to select option 3 "This is not a rename . . ." but thought I would get some feedback on this before pulling the trigger.

It's showing up in my securities list as 2 different securities with the same ticker but different CUSIPs

CaliQkn

@Stuart Boyle in Quicken, covered calls are recorded using short sale and cover short sale transactions. Here's a general approach:

1. Selling the Covered Call: Enter a Short Sale transaction for the call option you sold. This will add cash to your account.
2. Closing the Position:

• If the option expires worthless, enter a Cover Short Sale transaction with a price of $0.
• If the option is exercised, adjust the cost basis of the underlying stock accordingly.
• If you buy back the option, enter a Cover Short Sale transaction at the repurchase price.

Quicken does not handle options very well, so you may need to manually enter the stock symbol and track transactions carefully

q_lurker

Caveat: I am not a covered call investor.

Regarding the rename and two security aspects:

Both securities have CUSIPs applied so for both of those that information came from the brokerage download.

The CUSIP for your CHEVRON CORP security matches what I have in my file for Chevron dating back to 2002 or so. The Z96… CUSIP for the Chevron appears to me to be a non-standard designation. From Google's AI on this topic:

Here's a breakdown of CUSIPs in the context of covered calls:

• Underlying Stock: The stock you own and are using to "cover" the call option has its own unique CUSIP number.
• Call Option: Each specific call option contract (defined by its strike price, expiration date, and the underlying stock) also has its own unique CUSIP number. 

In essence, to execute and track a covered call strategy, you need the CUSIP for:

1. The Stock: The shares of the company you own.
2. The Call Option: The specific call option contract you're selling

While I am still a bit confused about which is which (the brokerage appears to be saying you own 111 shares of the base stock ticker CVX CUSIP 166764100 and not acknowledging the call option), it would appear you might be right in taking the third option considering these to be separate securities. I would then take the steps to properly name the covered call security uniquely and eliminate the ticker duplication.

Stuart Boyle

Upon reviewing the responses and recording the entries as a series of short sales and covering sales, I have decided it adds additional complexity without providing any additional value/insight. My shares balances don't reconcile to the dealer but I can see they are offsetting. So instead I have decided to just report the premium earned/paid as miscellaneous income/expense. I did create a new income category called "Option Premium" the income/expense to be reported in. In the unlikely event that the shares are called away from me, then I will report the sale at the strike price of the option. Thanks to everyone who has provided me feedback.

Bob@45

I sell a lot of covered calls and sell a number of puts, the majority of which expire worthless (ie: the stocks don't change hands). My procedure:

1. When the short sell downloads, record it as a new security, with cash received (since I'm selling the option)
2. When the option closes, record it as covered.
3. If the option is assigned, record the stock sell or purchase at the strike price.

Stuart Boyle

https://community.quicken.com/discussion/comment/20491692#Comment_20491692

When or how is the premium "earned" under your method?

Bob@45

The premium is earned immediately on sale of the option. It's posted to my account in cash by my broker on their next closing day.

The premium is my "income" from selling an option, whether that option is in or out of the money at the end of its time period.

If out of the money, the stock itself does not change hands, and the premium is the only cash flow.

If in the money, then I either make or lose money on the stock transfer. The profit or loss on the stock transfer is totally independent of the option in my view, and as I record it.

If I bought 100 shares of a stock 5 years ago at $125 (invested $12,500), and sold a covered call for $5 (I earn $500) that closed out of the money, there's not yet any profit or loss on the stock. I sell another identical covered call later, same result, another $500 earned. No effect on stock P/L.

I do it a third time, at a strike of $200. The stock rises to $275 by the time the option expires. My contract is at $200, so I sell the stock at $200 per share, receive $20,000 cash, and I earned $7,500 profit on the stock, in addition to the $1,500 on the three options. If I hadn't sold that third contract, and instead sold the stock at market rate that expiration date, I would have received $7,500 more for the stock because the stock went up $150 from my original purchase price, not just $75. (I also would not have received that third $500 premium.) So I suffered some opportunity cost by selling the option and not accurately foretelling the future, but that's philosophical, not fiscal.

Does that make sense?