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.