Writing Call Options - a trading activity?

One More Toy

My friend asked me a question today i do not have the answer to (nothing new there)

He wants to start writing covered call options, whereby he buys the share and writes/sells the covered call option.

Is this a case 1 trade if he does it frequently? I would assume so just like any other trading activity

Peregrinus

No different from any other investment transaction, SFAIK. If he does it with sufficient system, method, frequency, etc then it can be a trade. Or, of course, if it's connected with a wider trade that he carries on - e.g. if he does this to manage foreign exchange risks that arise from more conventional trading activities of his.

One More Toy

Peregrinus wrote: »

No different from any other investment transaction, SFAIK. If he does it with sufficient system, method, frequency, etc then it can be a trade. Or, of course, if it's connected with a wider trade that he carries on - e.g. if he does this to manage foreign exchange risks that arise from more conventional trading activities of his.

Thanks for that, yeah i was thinking it would have to be a fairly frequent thing to be considered a trade

One More Toy

Peregrinus wrote: »

No different from any other investment transaction, SFAIK. If he does it with sufficient system, method, frequency, etc then it can be a trade. Or, of course, if it's connected with a wider trade that he carries on - e.g. if he does this to manage foreign exchange risks that arise from more conventional trading activities of his.

Just out of curiosity, does CGT apply to a sole trader or is the fair value change measured through P&L?

Peregrinus

One More Toy wrote: »

Just out of curiosity, does CGT apply to a sole trader or is the fair value change measured through P&L?

Um. If you're a sole trader - an IT consultant, say - and you dabble in options on the side, that has nothing to do with your trade and won't be recorded in your trading accounts, any more than your expenditure on going to the cinema or buying groceries would be.

If you're investing in options in the course of your trade, to manage exchange risks say, then the cost of purchasing the options is an expense, and the proceeds of the options are a receipt. At least, I think that's the way it is.

One More Toy

Peregrinus wrote: »

Um. If you're a sole trader - an IT consultant, say - and you dabble in options on the side, that has nothing to do with your trade and won't be recorded in your trading accounts, any more than your expenditure on going to the cinema or buying groceries would be.

If you're investing in options in the course of your trade, to manage exchange risks say, then the cost of purchasing the options is an expense, and the proceeds of the options are a receipt. At least, I think that's the way it is.

Sorry I should have clarified, if hes buying stock to implement writing covered calls, does the fair value change go into case I income or is it subject to CGT?

Peregrinus

It's unconnected with his trading activity; I think it would be wrapped up in the CGT calculation.

But I'm nearly out of my depth at this level of detail, so you might want to check with a professional.