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Author: Bob78164 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121219  
Subject: Re: ot: taxes/options/arbitrage? Date: 8/28/2012 3:25 PM
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jchoy writes (in part):

Say the S&P is trading at 1400.5, and options trade at a $1 increments. I put on a bull call spread between 1400 and 1401 for about $.5. Now more than a year goes by, and the S&P is now at 1500. The net profit on the position is $.5. But individually, the profit on the long option is going to be at around $100, and the loss is going to be around $99.5. Since the short call option is bearing the loss, it's counted as a short-term loss. The long call has a long term gain. If these were the only two transactions, it would pretty much be a wash ($.5 profit taxed at LT rates).

However, if i were a day trader, and over the course of the prosperous year, I'd racked up a short term gain of $99,500 (same as the loss on the short call). I would then be able to allocate the "short term losses" from the spread to the gains on the day trades, and have the long call taxed at a lower rate. Putting the trade on for that cheap is essentially a free tax hedge. Thoughts, anyone?


I reply:

It sounds like the sort of thing that's covered by the straddle rules of 26 U.S.C. § 1096. --Bob
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