Series 7 Exam Question 218: Answer and Explanation

Question: 218

Fred Freedom has held 100 shares of UPP stock for six months and decides to purchase a nine-month call on UPP. If the UPP call option expires and Fred decides to sell the UPP stock four months after the expiration of the call, what is Fred's tax position?

• A. Short-term capital gain or long-term capital loss
• B. Long-term capital gain or short-term capital loss
• C. Long-term capital gain or long-term capital loss
• D. Short-term capital gain or short-term capital loss

Correct Answer: C

Explanation:

C. Remember that short-term gains or losses are ones that take place in one year or less. The fact that Fred purchased a call option does not affect his holding period on the stock that he purchased. Because Fred has held the stock for 19 months (1 year and 7 months), the sale of the stock would be treated as a long-term capital gain or long-term capital loss.