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.)