37 lines
2.6 KiB
Plaintext
37 lines
2.6 KiB
Plaintext
378 Part Ill: Put Option Strategies
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stock owner would have been. If the company declared a stock dividend, it would
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have no effect on this strategy since the call owner is entitled to those. A change in
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interest rates is not a factor either, since the owner of the LEAPS should invest in a
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1-year Treasury bill or a 1-year CD and therefore would not be subject to interim
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changes in short-term interest rates.
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There may be other mitigating circumstances. Mostly these would involve tax
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considerations. If the stock is currently a profitable investment, the sale would gen
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erate a capital gain, and taxes might be owed. If the stock is currently being held at
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a loss, the purchase of the call would constitute a wash sale and the loss could not be
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taken at this time. (See Chapter 41 on taxes for a broader discussion of the wash sale
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rule and option trading.)
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In tl1eory, the calculations above could produce an overall credit, in which case the
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stockholder W(?uld normally want to substitute with the call, unless he has overriding tax
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considerations or suspects that a cash dividend increase is going to be announced. Be
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very careful about switching if this situation should arise. Normally, arbitrageurs - per
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sons trading for exchange members and paying no commission - would take advantage
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of such a situation before the general public could. If they are letting the opportunity
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pass by, there must be a reason (probably the cash dividend), so be extremely certain of
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your economics and research before venturing into such a situation.
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In summary, holders of common stock on which there exist in-the-money
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LEAPS should evaluate the economics of substituting the LEAPS call for the com
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mon stock. Even if arithmetic calculations call for the substitution, the stockholder
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should consider his tax situation as well as his outlook for the cash dividends to be
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paid by the common before making the switch.
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BUYING LEAPS AS THE INITIAL PURCHASE
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INSTEAD OF BUYING A COMMON STOCK
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Logic similar to that used earlier to determine whether a stockholder might want to
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substitute a LEAPS call for his stock can be used by a prospective purchaser of com
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mon stock. In other words, this investor does not already own the common. He is
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going to buy it. This prospective purchaser might want to buy a LEAPS call and put
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the rest of the money he had planned to use in the bank, instead of actually buying
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the stock itself.
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His costs - real and opportunity - are calculated in a similar manner to those
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expressed earlier. The only real difference is that he has to spend the stock commis
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sion in this case, whereas he did not in the previous example (since he already owned
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the stock). |