Married Puts

[krazeenyc]

http://www.dynamic-stock-market-strategies.com/marriedput.html

 

Given that there are a lot of concentrated investors on this board -- I thought that this link might have interest for some.

 

I originally thought that I might be able to  arbitrage the difference between short and long term capital gains -- which would make this strategy very interesting for me.  I was hoping to execute the strategy. Eventually selling the put for a short term loss, rolling it into another put that I would also eventually sell for a short term loss, and finally selling the stock for a long term gain. Guess that doesn't work. Is there any legal way around this? thx.

[muscleman]

Very interesting! Thanks for sharing that!

So basically, if I want to cut my loss and I know it is going to become a long term loss, this article provides a way to convert it to a short term loss. Just buy puts, immediately sell the puts, and then sell the stock, right?

 

I still haven't figured out the advantage of short term loss vs long term loss. If my gains are mostly long term, and my losses are mostly short term, I will not be able to pair them up, right?

[krazeenyc]

Very interesting! Thanks for sharing that!

So basically, if I want to cut my loss and I know it is going to become a long term loss, this article provides a way to convert it to a short term loss. Just buy puts, immediately sell the puts, and then sell the stock, right?

 

I still haven't figured out the advantage of short term loss vs long term loss. If my gains are mostly long term, and my losses are mostly short term, I will not be able to pair them up, right?

 

no it's not that. Once something is a long term gain or loss it (TYPICALLY) stays that way.

 

The article does offer a neat trick of keeping losses from become long term losses (when you want to hold on to a stock, don't want to run into wash sales, etc.) -- by buying and selling puts on the stock immediately -- effectively resetting the holding period on the stock.

 

[ERICOPOLY]

no it's not that. Once something is a long term gain or loss it stays that way.

 

I'm pretty sure a "constructive sale" can take a long term gain and turn it into a short term gain -- provided that you reverse the offsetting position prior to 30 days after the end of the year in which the gain was achieved.

 

I believe this starts a new holding period -- so now the gain is short term..

 

 

 

[krazeenyc]

no it's not that. Once something is a long term gain or loss it stays that way.

 

I'm pretty sure a "constructive sale" can take a long term gain and turn it into a short term gain -- provided that you reverse the offsetting position prior to 30 days after the end of the year in which the gain was achieved.

 

I believe this starts a new holding period -- so now the gain is short term..

 

This is true. They basically don't want you to be able to arb tax periods. (ie push taxes from 1 year to the next without risk0

[hyten1]

folks sorry on a related note (I think)

 

what if you have long term gains on calls you bought. if you exercise the call options, effectively you have gotten rid of your long term gain from the call right? the long term gain on the call is now converted to short term gain the the stock you just bought/exercise?

 

hy

[ERICOPOLY]

It's all very unfair.

 

A married couple can purchase a home with a non-recourse FHFA loan -- they only need 3.5% down payment.

 

So they are effectively "going long" the value of the home but hedging all their risk at a strike price that is 3.5% below market price.

 

The "non recourse" is effectively a put!

 

They have only 3.5% of the value of the asset at risk (hardly anything, similar to an at-the-money married put), so does the IRS punish them by making their gains "short term"? 

 

Of course not, instead the tax code rewards them by making their first $500,000 completely tax free!

 

It's crazy.

 

 

So this gives me an idea... can we start a brokerage that makes "non-recourse" margin loans to investors (and the brokerage itself does the hedging on the loans).  That way the individual investor knows nothing about the puts, and doesn't get his tax situation all bungled up.

[muscleman]

It's all very unfair.

 

A married couple can purchase a home with a non-recourse FHFA loan -- they only need 3.5% down payment.

 

So they are effectively "going long" the value of the home but hedging all their risk at a strike price that is 3.5% below market price.

 

The "non recourse" is effectively a put!

 

They have only 3.5% of the value of the asset at risk (hardly anything, similar to an at-the-money married put), so does the IRS punish them by making their gains "short term"? 

 

Of course not, instead the tax code rewards them by making their first $500,000 completely tax free!

 

It's crazy.

 

 

So this gives me an idea... can we start a brokerage that makes "non-recourse" margin loans to investors (and the brokerage itself does the hedging on the loans).  That way the individual investor knows nothing about the puts, and doesn't get his tax situation all bungled up.

 

No. I don't think the "The "non recourse" is effectively a put!". They are required to pay a hefty mortgage insurance premium upfront, and a monthly PMI. This PMI payment is the purchase of the put.

[ERICOPOLY]

It's all very unfair.

 

A married couple can purchase a home with a non-recourse FHFA loan -- they only need 3.5% down payment.

 

So they are effectively "going long" the value of the home but hedging all their risk at a strike price that is 3.5% below market price.

 

The "non recourse" is effectively a put!

 

They have only 3.5% of the value of the asset at risk (hardly anything, similar to an at-the-money married put), so does the IRS punish them by making their gains "short term"? 

 

Of course not, instead the tax code rewards them by making their first $500,000 completely tax free!

 

It's crazy.

 

 

So this gives me an idea... can we start a brokerage that makes "non-recourse" margin loans to investors (and the brokerage itself does the hedging on the loans).  That way the individual investor knows nothing about the puts, and doesn't get his tax situation all bungled up.

 

No. I don't think the "The "non recourse" is effectively a put!". They are required to pay a hefty mortgage insurance premium upfront, and a monthly PMI. This PMI payment is the purchase of the put.

 

Example, the value of the house drops 50%.  Homeowner loses only 3.5% after walking away.

 

There is an implicit put.  They can literally put the house back to the lender.

[yadayada]

can I write puts with a cash account on IB? And can I do it while 100% invested? You need to hold you would have to pay in cash?

[krazeenyc]

can I write puts with a cash account on IB? And can I do it while 100% invested? You need to hold you would have to pay in cash?

 

Not sure what you are asking?

 

By the way I put on a trade/hedged investment a little bit ago.

 

I bought 3000 shares of LUKOY (appx $45) and bought RSX 6000 puts (Jan 2016 21 strikes)  for $3 a piece. No married put restrictions here!

 

I was hoping to find more similar type of hedges with domestic stocks and maybe some concentrated fund that offers puts -- but I haven't found any.  This way I get to participate in tax arbitrage AND my dividends are taxed at a favorable rate.