39 lines
2.0 KiB
Plaintext
39 lines
2.0 KiB
Plaintext
912
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Net sale proceeds ($300 - $25)
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Net cost ($100 + $25)
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Short-term gain:
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Part VI: Measuring and Trading Volatility
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$275
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-125
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$150
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If the investor had not bought the call back, but had been fortunate enough to be
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able to allow it to expire worthless, his gain for tax purposes would have been the
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entire $275, representing his net sale proceeds. The purchase cost is considered to
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be zero for an option that expires worthless.
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PUT WRITER
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The tax treatment of written puts is quite similar to that of written calls. If the put is
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bought back in the open market or is allowed to expire worthless, the transaction is
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a short-term capital item.
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Example: An investor writes an XYZ July 40 put for 4 points, and later buys it back
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for 2 points after a rally by the underlying stock. The commissions were $25 on each
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option trade, so the tax situation would be:
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Net put sale price ($400 - $25)
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Net put cost ($100 + $25)
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Short-term gain:
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$375
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-125
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$250
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If the put were allowed to expire worthless, the investor would have a net gain of
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$375, and this gain would be short-term.
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THE 60/40 RULE
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As mentioned earlier, nonequity option positions and future positions must be
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marked to market at the end of the tax year and taxes paid on both the unrealized and
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realized gains and losses. This same rule applies to futures positions. The tax rate on
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these gains and losses is lower than the equity options rate. Regardless of the actual
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holding period of the positions, one treats 60% of his tax liability as long-term and
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40% as short-term. This ruling means that even gains made from extremely short
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term activity such as day-trading can qualify partially as long-term gains.
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Since 1986, long-term and short-term capital gains rates have been equal. If
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long-term rates should drop, then the rule would again be more meaningful.
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Example: A trader in nonequity options has made three trades during the tax year.
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It is now the end of the tax year and he must compute his taxes. First, he bought S&P |