38 lines
2.9 KiB
Plaintext
38 lines
2.9 KiB
Plaintext
Chapter 41: Taxes 923
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able to participate in any rally in the stock in the next 30 days. If the underlying
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stock has listed put options, the investor may be able to partially offset this neg
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ative effect. By selling an in-the-money put at the same time that the stock is
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sold, the investor will be able to take his stock loss on the current year's taxes
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and also will be able to participate in price movements on the underlying stock.
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If the stock should rally, the put will decrease in price. However, if the stock ral
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lies above the striking price of the put, the investor will not make as much from the
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put sale as he would have from the ownership of the stock. Still, he does realize some
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profits if the stock rallies.
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Conversely, if the stock falls in price, the investor will lose on the put sale. This
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certainly represents a risk although no more of a risk than owning the stock did. An
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additional disadvantage is that the investor who has sold a put will not receive the div
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idends, if any are paid by the underlying stock.
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Once 30 days have passed, the investor can cover the put and repurchase the
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underlying stock. The investor who utilizes this tactic should be careful to select a put
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sale in which early assignment is minimal. Therefore, he should sell a long-term, in
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the-money put when utilizing this strategy. (He needs the in-the-money put in order
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to participate heavily in the stock's movements.) Note that if stock should be put to
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the investor before 30 days had passed, he would thus be forced to buy stock, and the
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wash sale rule would be invoked, preventing him from taking the tax loss on the stock
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at that time. He would have to postpone taking the loss until he makes a sale that
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does not invoke the wash sale rule.
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Finally, this strategy must be employed in a margin account, because the put
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sale will be uncovered. Obviously, the money from the sale of the stock itself can be
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used to collateralize the sale of the put. If the stock should drop in value, it is always
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possible that additional collateral will be required for the uncovered put.
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THE SHORT-SALE RULE - PUT HOLDER'S PROBLEM
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A put purchase made by an investor who also owns the underlying stock may have an
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effect on the holding period of the stock. If a stock holder buys a put, he would nor
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mally do so to eliminate some of the downside risk in case the stock falls in price.
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However, if a put option is purchased to protect stock that is not yet held long enough
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to qualify for long-term capital gains treatment, the entire holding period of the stock
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is wiped out. Furthermore, the holding period for the stock will not begin again until
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the put is disposed of. For example, if an investor has held XYZ for 11 months - not
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quite long enough to qualify as a long-term holding - and then buys a put on XYZ,
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he will wipe out the entire accrued holding period on the stock. Furthermore, when
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he finally disposes of the put, the holding period for the stock must begin all over |