39 lines
3.1 KiB
Plaintext
39 lines
3.1 KiB
Plaintext
Chapter 41: Taxes 929
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Example: An investor has written an uncovered XYZ January 50 call for 5 points and
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the call has dropped in value to 1 point in early December. He might want to take
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the 4-point gain, but would prefer to defer realization of the gain until the following
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tax year. Since the call write is at a profit, the stock must have dropped and is prob
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ably selling around 45 in early December. Buying the underlying stock would not
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accomplish his purpose, because if the stock continued to decline through year-end,
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he could lose a substantial amount on the stock purchase and could make only 1 more
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point on the call write. Similarly, a call purchase would not work well. A call with a
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lower striking price - for example, the XYZ January 45 or the January 40- could lose
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substantial value if the underlying stock continued to drop in price. An out-of-the
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money call - the XYZ January 60 - is also unacceptable, because if the underlying
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stock rallied to the high 50's, the writer would lose money both on his January 50 call
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write and on his January 60 call purchase at expiration. Writing a put option would
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not "lock in" the profit either. If the underlying stock continued to decline, the loss
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es on the put write would certainly exceed the remaining profit potential of 1 point
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in the January 50 call. Alternatively, if the stock rose, the losses on the January 50 call
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could offset the limited profit potential provided by a put write. Thus, there is no rel
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atively safe way for an uncovered call writer to attempt to "lock in" an unrealized gain
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for the purpose of deferring it to the following tax year. The put writer seeking to
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defer his gains faces similar problems.
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UNEQUAL TAX TREATMENT ON SPREADS
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There are two types of spreads in which the long side may receive different tax treat
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ment than the short side. One is the normal equity option spread that is held for more
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than one year. The other is any spread between futures, futures options, or cash
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based options and equity options.
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With equity options, if one has a spread in place for more than one year and if
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the movement of the underlying stock is favorable, one could conceivably have a
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long-term gain on the long side and a short-term loss on the short side of the spread.
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Example: An investor establishes an XYZ bullish call spread in options that have 15
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months of life remaining: In October of one year, he buys the January 70 LEAPS call
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expiring just over a year in the future. At the same time, he sells the January 80
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LEAPS call, again expiring just over a year hence. Suppose he pays 13 for the January
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70 call and receives 7 for the January 80 call. In December of the following year, he
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decides to remove the spread, after he has held it for more than one year - specifi
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cally, for 14 months in this case. XYZ has advanced by that time, and the spread is
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worth 9. With XYZ at 90, the January 70 call is trading at 20 and the January 80 call
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is trading at 11. The capital gain and loss results for tax purposes are summarized in
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the following table (commissions are omitted from this example): |