35 lines
2.6 KiB
Plaintext
35 lines
2.6 KiB
Plaintext
0.,,,,, I 7: Put Buying in Conjundion with Common Stock Ownership
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JAX CONSIDERATIONS
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275
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Although tax considerations are covered in detail in a later chapter, an important tax
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law concerning the purchase of puts against a common stock holding should be men
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tioned at this time. If the stock owner is already a long-term holder of the stock at the
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time that he buys the put, the put purchase has no effect on his tax status. Similarly,
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if the stock buyer buys the stock at the time that he buys the put and identifies the
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position as a hedge, there is no effect on the tax status of his stock. However, if one
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is currently a short-term holder of the comrrwn stock at the time that he buys a put,
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he eliminates any accrued holding period on his comrrwn stock. Moreover, the hold
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ing period for that stock does not begin again until the put is sold.
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Example: Assume the long-term holding period is 6 months. That is, a stock owner
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must own the stock for 6 months before it can be considered a long-term capital gain.
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An investor who bought the stock and held it for 5 months and then purchased a put
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would wipe out his entire holding period of 5 months. Suppose he then held the put
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and the stock simultaneously for 6 months, liquidating the put at the end of 6 months.
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His holding period would start all over again for that common stock. Even though he
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has owned the stock for 11 months - 5 months prior to the put purchase and 6
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months more while he simultaneously owned the put - his holding period for tax pur
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poses is considered to be zero!
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This law could have important tax ramifications, and one should consult a tax advisor
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if he is in doubt as to the effect that a put purchase might have on the taxability of
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his common stock holdings.
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PUT BUYING AS PROTECTION FOR THE COVERED CALL WRITER
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Since put purchases afford protection to the owner of common stock, some investors
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naturally feel that the same protective feature could be used to limit their downside
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risk in the covered call writing strategy. Recall that the covered call writing strategy
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involves the purchase of stock and the sale of a call option against that stock. The cov
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ered write has limited upside profit potential and offers protection to the downside in
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the amount of the call premium. The covered writer will make money if the stock falls
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a little, remains unchanged, or rises by expiration. The covered writer can actually lose
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money only if the stock falls by more than the call premium received. He has poten
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tially large downside losses. This strategy is known as a protective collar or, more sim
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ply, a "collar." (It is also called a "hedge wrapper," although that is an outdated term.) |