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+926 Part VI: Measuring and Trading Volatillty 
+in-the-money put for this purpose. By so doing, he would be spending as little as pos­
+sible in the way of time value premium for the put option and he would also be lock­
+ing in his gain on the call. The gains and losses from the put and call combination 
+would nearly equal each other from that time forward as the stock moves up or down, 
+unless the stock rallies strongly, thereby exceeding the striking price of the put. This 
+would be a happy event, however, since even larger gains would accrue. The combi­
+nation could be liquidated in the following tax year, thus achieving a gain. 
+Example: On September 1st, an investor bought an XYZ January 40 call for 3 points. 
+The call is due to expire in the following year. XYZ has risen in price by December 
+1st, and the call is selling for 6 points. The call holder might want to take his 3-point 
+gain on the call, but would also like to defer that gain until the following year. He 
+might be able to do this by buying an XYZ January 50 put for 5 points, for example. 
+He would then hold this combination until after the first of the new year. At that 
+time, he could liquidate the entire combination for at least 10 points, since the strik­
+ing price of the put is 10 points greater than that of the call. In fact, if the stock should 
+have climbed to or above 50 by the first of the year, or should have fallen to or below 
+40 by the first of the year, he would be able to liquidate the combination for more 
+than 10 points. The increase in time value premium at either strike would also be a 
+benefit. In any case, he would have a gain - his original cost was 8 points (3 for the 
+call and 5 for the put). Thus, he has effectively deferred taking the gain on the orig­
+inal call holding until the next tax year. The risk that the call holder incurs in this type 
+of transaction is the increased commission charges of buying and selling the put as 
+well as the possible loss of any time value premium in the put itself. The investor 
+must decide for himself whether these risks, although they may be relatively small, 
+outweigh the potential benefit from deferring his tax gain into the next year. 
+Another way in which the call holder might be able to defer his tax gain into the 
+next year would be to sell another XYZ call against the one that he currently holds. 
+That is, he would create a spread. To assure that he retains as much of his current 
+gain as possible, he should sell an in-the-money call. In fact, he should sell an in-the­
+money call with a lower striking price than the call held long, if possible, to ensure 
+that his gain remains intact even if the underlying stock should collapse substantial­
+ly. Once the spread has been established, it could be held until the following tax year 
+before being liquidated. The obvious risk in this means of deferring gain is that one 
+could receive an assignment notice on the short call. This is not a remote possibility, 
+necessarily, since an in-the-money call should be used as protection for the current 
+gain. Such an assignment would result in large commission costs on the resultant pur­
+chase and sale of the underlying stock, and could substantially reduce one's gain.