Options contracts - called away

So this is my understanding but I’m hoping someone with experience can confirm or correct my interpretation.

When you sell a covered call option, your contract can be ‘called away’, in which case you have the ability to either settle in cash or deliver the underlying.

We have a client with significant capital gains in his stock and he wanted to hedge market risk, so we sold call options and purchased put options. Is it possible that we look into his account one day and see he no longer is short the call option and has seen shares of stock ‘called away’? If so, that would trigger massive capital gains implications for him.

If the stock price reaches or exceeds the strike price on the option, the shares can be “called” and will be automatically sold for cash at the strike price. So yes, you could wake up and see the stock sold and you could have a large capital gain realized.

You can exit the trade by purchasing the other side of it before it gets to the strike price, and there are many shops that do this on a routine basis, but that is a different story.

You didnt do him any favors by selling calls other than maybe pay for some of the put premium…I would recommend not entering into options contracts until your firm understands them.

Talk to your broker-dealer. There should be a way to make cash settlements the default option.

American ITM options yes.

European ITM call options, no.

Yes, it is possible that your short call option position will be exercised. Presumably, the tax implication is that your client must sell the stock at that strike price, thus recognizing realized gains.

However, this generally happens only when the call options are deep in-the-money. For instance, lets say you sold 10% OTM calls. The stock rallies 40% and your options are now approximately 30% ITM. So, as long as the stock price is below the strike of the calls, exercise is extremely unlikely.