35 lines
2.6 KiB
Plaintext
35 lines
2.6 KiB
Plaintext
G,pter 17: Put Buying in Conjunction with Common Stock Ownership
|
||
TAX CONSIDERATIONS
|
||
275
|
||
Although tax considerations are covered in detail in a later chapter, an important tax
|
||
law concerning the purchase of puts against a common stock holding should be men
|
||
tioned at this time. If the stock owner is already a long-term holder of the stock at the
|
||
time that he buys the put, the put purchase has no effect on his tax status. Similarly,
|
||
if the stock buyer buys the stock at the time that he buys the put and identifies the
|
||
position as a hedge, there is no effect on the tax status of his stock. However, if one
|
||
Is currently a short-tenn holder of the common stock at the time that he buys a put,
|
||
he eliminates any accrued holding period on his common stock. Moreover, the hold
|
||
ing period for that stock does not begin again until the put is sold.
|
||
Example: Assume the long-term holding period is 6 months. That is, a stock owner
|
||
must own the stock for 6 months before it can be considered a long-term capital gain.
|
||
An investor who bought the stock and held it for 5 months and then purchased a put
|
||
would wipe out his entire holding period of 5 months. Suppose he then held the put
|
||
and the stock simultaneously for 6 months, liquidating the put at the end of 6 months.
|
||
His holding period would start all over again for that common stock. Even though he
|
||
has owned the stock for 11 months - 5 months prior to the put purchase and 6
|
||
months more while he simultaneously owned the put - his holding period for tax pur
|
||
poses is considered to be zero!
|
||
This law could have important tax ramifications, and one should consult a tax advisor
|
||
if he is in doubt as to the effect that a put purchase might have on the taxability of
|
||
his common stock holdings.
|
||
PUT BUYING AS PROTECTION FOR THE COVERED CALL WRITER
|
||
Since put purchases afford protection to the owner of common stock, some investors
|
||
naturally feel that the same protective feature could be used to limit their downside
|
||
risk in the covered call writing strategy. Recall that the covered call writing strategy
|
||
involves the purchase of stock and the sale of a call option against that stock. The cov
|
||
ered write has limited upside profit potential and offers protection to the downside in
|
||
the amount of the call premium. The covered writer will make money if the stock falls
|
||
a little, remains unchanged, or rises by expiration. The covered writer can actually lose
|
||
money only if the stock falls by more than the call premium received. He has poten
|
||
tially large downside losses. This strategy is known as a protective collar or, more sim
|
||
ply, a "collar." (It is also called a "hedge wrapper," although that is an outdated term.) |