Robert, in this strategy, I never sold my shares. I sold someone else's, and used my shares as collateral to cover the short. The taxes assessed to me will occur if I buy back the shorted stock at a discount to what I shorted it for.
For instance, let's say I shorted 10,000 shares at $60. The gross proceeds of the sale are $600,000. If I close out that short at $50, then I have to spend $500,000 to do so. I pocket the difference of $100,000, but I have to pay taxes on that at current income rates.
In its purest form, my bet is that the stock will either trade above $66 (Jan 55 Call premium of $11 + $55 call strike price)or trade below $49 ($60 short price - $11 call premium) on 12/31/98. If the stock is trading between $66 and $49 on 12/31, I lose some money depending on exactly where (since the option will have value as long as the stock is above $55. The closer it is to $66 the less I lose). I would lose the most if the price of the stock was $55. While I'd make $5 per share on the short, I'd lose the premium of $11 on the call for an overall loss of $6 per share.
The beauty of this strategy is that I have 100% protection from the stock tanking below $49 while the short is open, but I'm hedged against the stock soaring with the calls. I also have the flexibility of closing out the short on a dip, and keeping or selling the calls.
As for IRS testing, it's my understanding that the law only requires you to close the position out by 12/31.
Regards,
LoD |
