35 lines
2.2 KiB
Plaintext
35 lines
2.2 KiB
Plaintext
Chapter 41: Taxes 911
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Alternatively, if the stock had fallen in price by October expiration and the October
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50 call had expired worthless, the call buyer would have lost $525 - his entire net
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cost. If he had held the call until it expired worthless, he would have a short-term
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capital loss of $525 to report among his taxable transactions.
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PUT BUYER
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The holder of a put has much the same tax consequences as the holder of a call, pro
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vided that he is not also long the underlying stock. This initial discussion of tax con
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sequences to the put holder will assume that he does not simultaneously own the
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underlying stock. If the put holder sells his put in the option market or allows it to
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expire worthless, the gain or loss is treated as capital gain, long-term for equity puts
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held more than one year. Historically, the purchase of a put was viewed as perhaps
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the only way an investor could attain a long-term gain in a declining market.
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Example: An investor buys an XYZ April 40 put for 2 points with the stock at 43.
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Later, the stock drops in price and the put is sold for 5 points. The commissions were
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$25 on each option trade, so the tax consequences would be:
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Net sale proceeds ($500 - $25)
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Net cost ($200 + $25)
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Short-term capital gain:
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$475
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-225
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$250
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Alternatively, if he had sold the put at a loss, perhaps in a rising market, he would
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have a short-term capital loss. Furthermore, if he allowed the put to expire totally
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worthless, his short-term loss would be equal to the entire net cost of $225.
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CALL WRITER
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Written calls that are bought back in the listed option market or are allowed to expire
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worthless are short-term capital gains. A written call cannot produce a long-term
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gain, regardless of the holding period. This treatment of a written call holds true even
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if the investor simultaneously owned the underlying stock (that is, he had a covered
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write). As long as the call is bought back or allowed to expire worthless, the gain or
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loss on the call is treated separately from the underlying stock for tax purposes.
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Example: A trader sells naked an XYZ July 30 call for 3 points and buys it back three
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months later at a price of 1. The commissions were $25 for each trade, so the tax gain
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would be: |