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+G,pter 17: Put Buying in Conjunction with Common Stock Ownership 
+TAX CONSIDERATIONS 
+275 
+Although tax considerations are covered in detail in a later chapter, an important tax 
+law concerning the purchase of puts against a common stock holding should be men­
+tioned at this time. If the stock owner is already a long-term holder of the stock at the 
+time that he buys the put, the put purchase has no effect on his tax status. Similarly, 
+if the stock buyer buys the stock at the time that he buys the put and identifies the 
+position as a hedge, there is no effect on the tax status of his stock. However, if one 
+Is currently a short-tenn holder of the common stock at the time that he buys a put, 
+he eliminates any accrued holding period on his common stock. Moreover, the hold­
+ing period for that stock does not begin again until the put is sold. 
+Example: Assume the long-term holding period is 6 months. That is, a stock owner 
+must own the stock for 6 months before it can be considered a long-term capital gain. 
+An investor who bought the stock and held it for 5 months and then purchased a put 
+would wipe out his entire holding period of 5 months. Suppose he then held the put 
+and the stock simultaneously for 6 months, liquidating the put at the end of 6 months. 
+His holding period would start all over again for that common stock. Even though he 
+has owned the stock for 11 months - 5 months prior to the put purchase and 6 
+months more while he simultaneously owned the put - his holding period for tax pur­
+poses is considered to be zero! 
+This law could have important tax ramifications, and one should consult a tax advisor 
+if he is in doubt as to the effect that a put purchase might have on the taxability of 
+his common stock holdings. 
+PUT BUYING AS PROTECTION FOR THE COVERED CALL WRITER 
+Since put purchases afford protection to the owner of common stock, some investors 
+naturally feel that the same protective feature could be used to limit their downside 
+risk in the covered call writing strategy. Recall that the covered call writing strategy 
+involves the purchase of stock and the sale of a call option against that stock. The cov­
+ered write has limited upside profit potential and offers protection to the downside in 
+the amount of the call premium. The covered writer will make money if the stock falls 
+a little, remains unchanged, or rises by expiration. The covered writer can actually lose 
+money only if the stock falls by more than the call premium received. He has poten­
+tially large downside losses. This strategy is known as a protective collar or, more sim­
+ply, a "collar." (It is also called a "hedge wrapper," although that is an outdated term.)