930 
Option 
XYZ January 70 LEAPS call 
XYZ January 80 LEAPS call 
Cost 
$1,300 
$1,100 
Part VI: Measuring and Trading Volatllity 
Proceeds 
$2,000 
$ 700 
Goin/Loss 
$700 long-term gain 
$400 short-term loss 
No taxes would be owed on this spread since one-half of the long-term gain is 
less than the short-term loss. The investor with this spread could be in a favorable 
position since, even though he actually made money in the spread - buying it at a 6-
point debit and selling it at a 9-point credit - he can show a loss on his taxes due to 
the disparate treatment of the two sides of the spread. 
The above spread requires that the stock move in a favorable direction in order 
for the tax advantage to materialize. If the stock were to move in the opposite direc­
tion, then one should liquidate the spread before the long side of the spread had 
reached a holding period of one year. This would prevent taking a long-term loss. 
Another type of spread may be even more attractive in this respect. That is a 
spread in which nonequity options are spread against equity options. In this case, the 
trader would hope to make a profit on the nonequity or futures side, because part of 
that gain is automatically long-term gain. He would simultaneously want to take a loss 
on the equity option side, because that would be entirely short-term loss. 
There is no riskless way to do this, however. For example, one might buy a pack­
age of puts on stocks and hedge them by selling an index put on an index that per­
forms more or less in line with the chosen stocks. If the index rises in price, then one 
would have short-term losses on his stock options, and part of the gain on his index 
puts would be treated as long-term. However, if the index were to fall in price, the 
opposite would be true, and long-term losses would be generated - not something 
that is normally desirable. Moreover, the spread itself has risk, especially the tracking 
risk between the basket of stocks and the index itself. 
This brings out an important point: One should be cautious about establishing 
spreads merely for tax purposes. He might wind up losing money, not to mention that 
there could be unfavorable tax consequences. As always, a tax advisor should be con­
sulted before any tax-oriented strategy is attempted. 
SUMMARY 
Options can be used for many tax purposes. Short-term gains can be deferred into 
the next tax year, or can be partially protected with out-of-the-money options until 
they mature into long-term gains. Long-term losses can be avoided with the purchase 
of a put or sale of a deeply in-the-money call. Wash sales can be avoided without giv­
ing up the entire ownership potential of the stock. There are risks as well as rewards