37 lines
2.9 KiB
Plaintext
37 lines
2.9 KiB
Plaintext
928 Part VI: Measuring and Trading Volatility
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DEFERRING A PUT HOLDER'S SHORT· TERM GAIN
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Without going into as much detail, there are similar ways in which a put holder who
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has a short-term gain on a put due to expire in the following tax year can attempt to
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defer the realization of that gain into the following tax year. One simple way in which
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he could protect his gain would be to buy a call option to protect his profitable put.
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He would want to buy an in-the-money call for this purpose. This resulting combina
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tion is similar in nature to the one described for the call buyer in the previous section.
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A second way that he could attempt to protect his gain and still defer its real
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ization into the following tax year would be to sell another XYZ put option against the
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one that he holds long. This would create a vertical spread. This put holder should
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attempt to sell an in-the-money put, if possible. Of course, he would not want to sell
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a put that was so deeply in-the-money that there is risk of early assignment. The
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results of such a spread are analogous to the call spread described in detail in the last
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section.
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Finally, the put holder could buy the underlying stock if he had enough avail
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able cash or collateral to finance the stock purchase. This would lock in the profit, as
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the stock and the put would offset each other in terms of gains or losses while the
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stock moved up or down. In fact, if the stock should experience a large rally, rising
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above the striking price of the put, even larger profits would become possible.
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In each of the tactics described, the position would be removed in the follow
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ing tax year, thereby realizing the gain that was deferred.
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DIFFICULTY OF DEFERRING GAINS FROM WRITING
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As a final point in this section on deferring gains from option transactions, it might
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be appropriate to describe the risks associated with the strategy of attempting to
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defer gains from uncovered option writing into the following tax year. Recall that in
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the previous sections, it was shown that a call or put holder who has an unrealized
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profit in an option that is due to expire in the following tax year could attempt to "lock
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in" the gain and defer it. The dollar risks to a holder attempting such a tax deferral
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were mainly commission costs and/or small amounts of time value premium paid for
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options. However, the option writer who has an unrealized profit may have a more
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difficult time finding a way to both "lock in" the gain and also defer its realization into
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the following tax year. It would seem, at first glance, that the call writer could mere
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ly take actions opposite to those that the call buyer takes: buying the underlying
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stock, buying another call option, or selling a put. Unfortunately, none of these
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actions "locks in" the call writer's profit. In fact, he could lose substantial investment
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dollars in his attempt to defer the gain into the following year. |