Herschel's question about unloading a boatload of options at once reminded me again of the wealth of knowledge - and even more importantly, experience - available on SI and in this thread. It's a huge boon for an individual investor to have such available to them - something truly without precedent in the pre-Net days. Thanks to all who contribute here.
In any case, here's my query for the week...
The 1986 tax reform act eliminated the use of almost all straddles as a tax-saving device/dodge. (The idea before that time was that you would basically take a low- or no-risk position on an equity via offsetting puts and calls, then close out the 'losing' half of the position at the very end of one tax year, waiting for the beginning of the next year to cash out the winning half, thereby deferring a fair bit of income for at least a year, at which time you could repeat the trick again).
However, let's say (hypothetically) that I've identified two different stocks, XXX and ZZZ, that appear to almost always move in tandem, up and down, over a considerable period of time (say the last 18 months or so). Nothing in the tax law prohibits me from taking offsetting positions in these two _different_ equities, such that if they continue to move in tandem, more or less, I will be able to implement a strategy like the above (i.e., sell off the losing position in one tax year, the winning one in another) and thereby reap the same tax benefits as the old straddle play would have.
Casting aside for the moment the issue of whether this is 'tricky', 'shady', or 'immoral', I have three basic questions for the thread to ponder and give advice on:
1) Can anyone see any problem (legal or financial) with the above strategy? (Ignore for now the obvious risk that the stocks could stop moving in tandem and make _both_ positions losing ones.)
2) Does anyone know of, or suspect there are, two such stocks? (I've seen EBAY and AMZN move in apparent lockstep recently, but their histories are much too short and their volatilities a little stratospheric for me to risk even this with them.)
3) If not, how would one best go about identifying two such equities based on an analysis of available market data? (N.B.: It's not enough for XXX and ZZZ to have similar or identical betas; they have to move similar percentages in similar time periods, either in exactly the same _or_ exactly the opposite directions, consistently.)
Many thanks for any speculation and cogitation on this one.
-Rose- |
