Re: AMD, taxes, options
John,
I was going to PM you back, but I thought others might find this interesting (and be in the same situation). We were talking about buying puts and taxes. I found this:
Q) What are married puts and when is the best time to use them?
A) A married put is simply the simultaneous purchase of stock and an equivalent number of puts to cover the shares. The put and the stock must be identified with each other, i.e., the stock is identified as the security that will be delivered upon exercise of the put. There have been tax advantages associated with married puts in that the put purchase is exempt from certain short-sale rules governing the holding periods of the underlying stock. Normally, a put bought to protect stock that has not been held long enough to be considered a long-term capital asset will wipe out the entire holding period of the stock. Thus, a put bought on a stock held for nine months, for example, will reset the holding period back to zero once the put is disposed of. The married put, however, may be exempt from this restriction, but only if the investor delivers the married stock or allows the put to expire (in which case the cost of the put would be added to the cost basis of the stock). Selling the put and stock separately would remove this exemption. The married put strategy would not apply to stocks that already qualify for long-term capital treatment, as these holding periods are not affected by the put purchase in the first place. According to the CBOE website, the tax advantages of this strategy are still not clear, as the Treasury Department has not yet issued a final ruling on the matter.
Married puts (or protective puts in general) should be used to protect against the potential of the underlying stock to move lower. For example, buying a 40 put at 1 for a stock at 42 would limit the downside risk by allowing the investor to sell the shares at 40, no matter how low the stock price before expiration. For this example, the maximum loss for the position would be 3 and would occur at a stock price of 40 or less. At 40, the option would expire worthless (cost of 1) and the stock would have lost 2. At 35, the option is worth 4 (5 points in the money minus the cost of 1), while the loss on the stock is 7. On the upside, the breakeven for the trade is at a stock price of 43 (the original price of 42 plus the cost of the put). In essence, buying the put caps your downside risk and raises the breakeven point, while allowing unlimited potential on the upside.
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This is my idea, let me know what you think. This seems fool proof to me. I think many others are in the same situation.
You;
A) own no AMD shares (currently)
B) have deep in the money AMD calls
C) are eager to establish shares because you're hoping for long term capital gains
D) but, have no cash
E) don't want to go on heavy margin
F) are trying to avoid year 2000 short term cap gain taxes
For example, say you have 20 contracts with a $45 strike that expire today. The stock price is $82. What do you do?
1) You could, exercise 10 and sell 10.
Since your options expire today, there will be no premium, so you get $37 a share. This leaves you with $8 per share, or 10% on margin. Even though you hate margin (and your wife might kill you if she finds out you're on margin) you find 10% margin within your risk range. You end up with 1000 shares and $37,000 in short term gains. At the beginning of year 2001 you will have to pull out roughly $18,500 to pay short cap gain taxes (you are in the 50% bracket). You can pull out $18.50 a share (maybe $9.25 after a split) to pay your taxes on margin. Hopefully, AMD has gone up and you have made decent money selling covered calls. If so, you will only have to keep 5-20% on margin and still be able to maintain your 1000 shares. You will also be in the position where your 1000 shares are now considered a long term gain whenever you decide to sell.
2) exercise all 20 and buy 20 Jan 2001 $50 puts.
You will be taking $90,000 on margin for the shares and $10,000 for the puts. The Jan 2001 $50 puts are going for 4 1/2 by 4 3/4. You can buy the puts and pay for all commissions for $10,000. This will increase you to $50 margin and $32 equity on your AMD shares. Your date to establish long term gains would start today. You would not have to take any short term gains in early 2001. In essence, you would convert your $45 call options that expire today to Jan 2001 $50's call options. Only $5 extra, to; gain an extra 9 months, take no margin risk, keep all 2000 shares, start your long term cap gains now, and avoid short term cap gains for year 2000. A hell of a deal if you ask me.
A) Worst case scenario, you put your shares at $50, which is only enough to pay your margin back, so you lose your initial investment. no margin risk (except interest)
B) Not even counting potential tax benefits, as long as AMD stays above roughly $85 you are in a better position.
C) You can sell twice as many covered calls. This will work your margin down by the same percentage per share, but it will be twice as much money in your pocket.
D) You hold absolutely no obligation to your puts. If things go good, you can let them expire and have long term gains 3 months away. If the outlook turns questionable, you can sell your puts and shares at any time, but for short term gains.
Does anyone see anything wrong with this?
Please give me some feedback on this strategy.
chic |
