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Non-Tech : Paired Trades and Hedging Strategies

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To: TimF who wrote (79)	1/15/2005 12:26:32 PM
From: Biomaven	Read Replies (1) of 136

Without rules like wash sales and straddle rules, sophisticated investors need never pay capital gains - gains can just be successively pushed off until the following year until the investor finally dies, whereupon their heirs get a step-up in basis. In fact you can still do something along these lines - it's just harder and not quite as certain. Assume you have a bunch of gains to shelter one year. A month or so from year-end, you start two positions that are very strongly negatively correlated, but not considered a straddle by the IRS. Say long 50 random stocks in the S&P 100 and short the other 50 (perhaps with options positions to gain leverage). Unless you are very unlucky, the positions will move in tandem, but in opposite directions - you take your loss in the one position to offset your earlier gains, but maintain the offsetting winning position, which you only close out early in the new year. Voila - you just shifted your gain from one year to the next. Repeat each year until you die or have a bad year in the market. Note this doesn't work by taking positions in broad-based index options, because these get marked-to-market at year-end. Peter

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