928 Part VI: Measuring and Trading Volatility 
DEFERRING A PUT HOLDER'S SHORT· TERM GAIN 
Without going into as much detail, there are similar ways in which a put holder who 
has a short-term gain on a put due to expire in the following tax year can attempt to 
defer the realization of that gain into the following tax year. One simple way in which 
he could protect his gain would be to buy a call option to protect his profitable put. 
He would want to buy an in-the-money call for this purpose. This resulting combina­
tion is similar in nature to the one described for the call buyer in the previous section. 
A second way that he could attempt to protect his gain and still defer its real­
ization into the following tax year would be to sell another XYZ put option against the 
one that he holds long. This would create a vertical spread. This put holder should 
attempt to sell an in-the-money put, if possible. Of course, he would not want to sell 
a put that was so deeply in-the-money that there is risk of early assignment. The 
results of such a spread are analogous to the call spread described in detail in the last 
section. 
Finally, the put holder could buy the underlying stock if he had enough avail­
able cash or collateral to finance the stock purchase. This would lock in the profit, as 
the stock and the put would offset each other in terms of gains or losses while the 
stock moved up or down. In fact, if the stock should experience a large rally, rising 
above the striking price of the put, even larger profits would become possible. 
In each of the tactics described, the position would be removed in the follow­
ing tax year, thereby realizing the gain that was deferred. 
DIFFICULTY OF DEFERRING GAINS FROM WRITING 
As a final point in this section on deferring gains from option transactions, it might 
be appropriate to describe the risks associated with the strategy of attempting to 
defer gains from uncovered option writing into the following tax year. Recall that in 
the previous sections, it was shown that a call or put holder who has an unrealized 
profit in an option that is due to expire in the following tax year could attempt to "lock 
in" the gain and defer it. The dollar risks to a holder attempting such a tax deferral 
were mainly commission costs and/or small amounts of time value premium paid for 
options. However, the option writer who has an unrealized profit may have a more 
difficult time finding a way to both "lock in" the gain and also defer its realization into 
the following tax year. It would seem, at first glance, that the call writer could mere­
ly take actions opposite to those that the call buyer takes: buying the underlying 
stock, buying another call option, or selling a put. Unfortunately, none of these 
actions "locks in" the call writer's profit. In fact, he could lose substantial investment 
dollars in his attempt to defer the gain into the following year.