38 lines
2.9 KiB
Plaintext
38 lines
2.9 KiB
Plaintext
924 Part VI: Measuring and Trading VolatHity
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again. The previous 11-month holding period is lost, as is the holding period during
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which the stock and put were held together. This tax consequence of a put purchase
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is derived from the general rules governing short sales, which state that the acquisi
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tion of an option to sell property at a fixed price (that is, a put) is treated as a short
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sale. This ruling has serious tax consequences for an investor who has bought a put
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to protect stock that is still in a short-term tax status.
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✓,,Married" Put and Stock. There are two cases in which the put purchase
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does not affect the holding period of the underlying stock. First, if the stock has
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already been held long enough to qualify for long-term capital treatment, the
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purchase of a put has no bearing on the holding period of the underlying stock.
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Second, if the put and the stock that it is intended to protect are bought at the
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same time, and the investor indicates that he intends to exercise that particular
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put to sell those particular shares of stock, the put and the stock are considered
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to be "married" and the normal tax rulings for a stock holding would apply. The
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investor must actually go through with the exercise of the put in order for the
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"married" status to remain valid. If he instead should allow the put to expire
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worthless, he could not take the tax loss on the put itself but would be forced to
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add the put' s cost to the net cost of the underlying stock. Finally, if the investor
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neither exercises the put nor allows it to expire worthless but sells both the put
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and the stock in their respective markets, it would appear that the short sale
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rules would come back into effect.
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This definition of "married" put and stock, with its resultant ramifications, is
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quite detailed. What exactly are the consequences? The "married" rule was original
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ly intended to allow an investor to buy stock, protect it, and still have a chance of real
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izing a long-term gain. This is possible with options with more than one year of life
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remaining. The reader must be aware of the fact that, if he initially "marries" stock
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and a listed 3-month put, for example, there is no way that he can replace that put at
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its expiration with another put and still retain the "married" status. Once the original
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"married" put is disposed of - through sale, exercise, or expiration - no other put may
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be considered to be "married" to the stock.
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Protecting a Long· Term Gain or Avoiding a Long-Term Loss. The
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investor may be able, at times, to use the short-sale aspect of put purchases to
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his advantage. The most obvious use is that he can protect a long-term gain with
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a put purchase. He might want to do this if he has decided to take the long-term
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gain, but would prefer to delay realizing it until the following tax year. A pur
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chase of a put with a maturity date in the following year would accomplish that
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purpose. |