38 lines
3.2 KiB
Plaintext
38 lines
3.2 KiB
Plaintext
926 Part VI: Measuring and Trading Volatillty
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in-the-money put for this purpose. By so doing, he would be spending as little as pos
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sible in the way of time value premium for the put option and he would also be lock
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ing in his gain on the call. The gains and losses from the put and call combination
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would nearly equal each other from that time forward as the stock moves up or down,
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unless the stock rallies strongly, thereby exceeding the striking price of the put. This
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would be a happy event, however, since even larger gains would accrue. The combi
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nation could be liquidated in the following tax year, thus achieving a gain.
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Example: On September 1st, an investor bought an XYZ January 40 call for 3 points.
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The call is due to expire in the following year. XYZ has risen in price by December
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1st, and the call is selling for 6 points. The call holder might want to take his 3-point
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gain on the call, but would also like to defer that gain until the following year. He
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might be able to do this by buying an XYZ January 50 put for 5 points, for example.
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He would then hold this combination until after the first of the new year. At that
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time, he could liquidate the entire combination for at least 10 points, since the strik
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ing price of the put is 10 points greater than that of the call. In fact, if the stock should
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have climbed to or above 50 by the first of the year, or should have fallen to or below
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40 by the first of the year, he would be able to liquidate the combination for more
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than 10 points. The increase in time value premium at either strike would also be a
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benefit. In any case, he would have a gain - his original cost was 8 points (3 for the
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call and 5 for the put). Thus, he has effectively deferred taking the gain on the orig
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inal call holding until the next tax year. The risk that the call holder incurs in this type
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of transaction is the increased commission charges of buying and selling the put as
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well as the possible loss of any time value premium in the put itself. The investor
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must decide for himself whether these risks, although they may be relatively small,
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outweigh the potential benefit from deferring his tax gain into the next year.
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Another way in which the call holder might be able to defer his tax gain into the
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next year would be to sell another XYZ call against the one that he currently holds.
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That is, he would create a spread. To assure that he retains as much of his current
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gain as possible, he should sell an in-the-money call. In fact, he should sell an in-the
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money call with a lower striking price than the call held long, if possible, to ensure
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that his gain remains intact even if the underlying stock should collapse substantial
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ly. Once the spread has been established, it could be held until the following tax year
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before being liquidated. The obvious risk in this means of deferring gain is that one
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could receive an assignment notice on the short call. This is not a remote possibility,
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necessarily, since an in-the-money call should be used as protection for the current
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gain. Such an assignment would result in large commission costs on the resultant pur
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chase and sale of the underlying stock, and could substantially reduce one's gain. |