Ed,
You should really get more info from a broker. If you want to pm me, I can suggest a firm that has a good program.
Having said that, I'll try to answer your questions, briefly.
To keep it simple, we'll use a 1 share example.
A year ago you bought Certicom. $10. Today it is worth $150.
Today, you "forward sell" it to me. I.e., you agree to sell me your shares, say 1 year from now, for $150 (it actually won't be for $150, but let's keep it simple for now). Note, I have also agreed to "forward buy" it from you, for $150 in a year.
Let's forget about how you access your money, for now. Note, though, that you have not actually sold your shares yet. No capital gains tax, so far. You also retain voting control of your shares. (Although your shares may be pledged, maybe, to the forward buyer.)
Fast forward a year. Certicom is trading at:
A) $200. Your shares have appreciated, and the forward buyer is entitled to buy them from you at $150. Instead of completing the contract, you settle the contract by buying it back. You owe me $50 (a capital loss to you... hey, I know someone who can use a capital loss - you!) to be let out of the obligation of selling me stock worth $200 for $150. You bore no price risk because your shares appreciated in concert with the value of my forward buy.
B) $100. The forward buyer is obliged to pay you $150 for the shares. You locked in that price. I would rather not do that. I'll pay you $50 to be let out of my commitment to pay you $150 for a $100 stock. (A capital gain to you of $50, which locked in the $150 price. Better than a capital gain of $140. You just saved about $36 in taxes. And had use of your money for the year. To buy that boat, or shares in Bank of Montreal, or whatever. Nice deal.
By the way, I didn't "lose" money in scenario B, because I hedged myself by shorting the stock, spot, when I entered into the forward. So I will be covering my short at a profit equal to the decline in the shares. Cool, huh?
Then we do it all over again at the new price.
Re: your second question, yeah, it is a tax driven strategy. Absolutely. That's what the thread is about, right? Nice problems to have, though.
Regards, |
