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