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Short a stock for long-term gain?
Old 09-06-2010, 06:33 PM   #1
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Short a stock for long-term gain?

Here is my situation:

I bought a significant amount of Altria (MO) on Oct 26 2009. It is up 27% since I bought it. I am very concerned that the market is about to take a significant hit this fall. So:

1) If I sell MO now, it will be a short-term gain
2) If I wait until Oct 27 to sell, it will be a long-term gain, and result in an almost $1500 tax saving
3) I'd like to lock in the gain until it becomes long-term

Altria is getting ready to pay a dividend (ex-date 9/13). So if I short an equal amount of shares that I currently hold on the ex-dividend date, wouldn't that just lock in the gain regardless of what the market does? And then I can just sell (or cover) both after I reach the long-term criteria?

Is there something basic that I am missing?

Thanks!
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Old 09-06-2010, 06:39 PM   #2
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Isn't this situation exactly what options are for?

Isn't this situation exactly what carryover losses are for?
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Old 09-06-2010, 07:02 PM   #3
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Time for a collar, IMO. If you own 1000 shares, buy 10 November or December puts at a strike price that gives you little or no cash outlay if you sell 10 November or December calls at a price above where the stock trades.

You can do the reverse if you are bullish, too. I wanted to add a bit to my LOW position right before they reported earnings. So I sold some puts and bought some calls. Cash out of pocket was minimal, but I replicated a long position.
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Old 09-06-2010, 08:01 PM   #4
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Time for a collar, IMO. If you own 1000 shares, buy 10 November or December puts at a strike price that gives you little or no cash outlay if you sell 10 November or December calls at a price above where the stock trades.

You can do the reverse if you are bullish, too. I wanted to add a bit to my LOW position right before they reported earnings. So I sold some puts and bought some calls. Cash out of pocket was minimal, but I replicated a long position.
This is a good suggestion.

As an alternative, if the intention is simply to try and sell the stock after 27 October at around today's prices, consider writing an in the money call option against the stock with a maturity date after 27 October (probably in November):

1. if the shares fall below the strike, you will still own the shares but will have pocketed the cash from the option writing

2. if the shares remain above the strike, the option will be exercised and you will have sold the shares for strike price + option premium (which will be a bit more than the current share price)

I am unfamilair with the US tax rules on writing options. If the option premium is treated as taxable income at the time the option is written (instead of when it is exercised or closed out), then you will need to consider whether the difference between (i) the strike price + the option premium and (ii) the current share price is sufficient to overcome the tax cost.
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Old 09-06-2010, 08:17 PM   #5
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Be careful with writing a call option. The stock could get called away before your Oct 26 date. Also isn't there some interaction of options and the underlying stock with respect to long-term / short-term gains? It's been quite a while since I did some option trading.

OTOH, I cannot imagine that one does not have enough carryover losses to offset any gains you might make with this one stock.
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Old 09-07-2010, 12:05 PM   #6
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So what it the advantage to using options to lock in a price instead of just shorting an equal number of shares?

Sorry for my ignorance...I have no options experience whatsoever...
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Old 09-07-2010, 12:44 PM   #7
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So what it the advantage to using options to lock in a price instead of just shorting an equal number of shares?
Because if you short the shares and the price rises, you are committed to selling those shares, which you don't have, at a fixed price, so you have to buy them at the higher price and take the hit. Your downside is potentially unlimited. If you buy an option, then if exercising it would make you money, you do so, and if it wouldn't, you just walk away. Either way you pay for the price of the option, so in the case where you gain, you don't gain as much as you would have done by shorting, and where you lose, you lose the entire price of the option. But it's generally a lot less risky than shorting.
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Old 09-07-2010, 01:54 PM   #8
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Because if you short the shares and the price rises, you are committed to selling those shares, which you don't have, at a fixed price, so you have to buy them at the higher price and take the hit. Your downside is potentially unlimited.
But if he shorts an equal number to what he owns, he is covered. There is no downside, it is a dollar-for-dollar-share-for-share wash (outside of comm/fees and money tied up).

A put might still be a better way to go.

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Old 09-07-2010, 09:36 PM   #9
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This is called "shorting against the box", and the short may be considered a "constructive selling", locking in the gain as a short term unless certain conditions are met. See

http://en.wikipedia.org/wiki/Short_%28finance%29

about 2/3rds of the way down.
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Old 09-08-2010, 12:04 AM   #10
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This is called "shorting against the box", and the short may be considered a "constructive selling", locking in the gain as a short term unless certain conditions are met. See

http://en.wikipedia.org/wiki/Short_%28finance%29

about 2/3rds of the way down.
My understanding is that what you are trying to automatically will disqualify you from getting long term capital gain.

The folks at fairmark.org generally have the best resources for tax implications for investors along with lots of knowledgeable people including CPAs, and former IRS agents to ask questions.

The rules about covered calls are bit more complicated but as long as you stick to writing say Dec 20 or even Dec 15 call, you should be fine, unless of course the market really crashes.

FYI, I wrote puts for MO @20 that expire on 9/18 and I am figuring that I am still not going to get a chance to buy more shares.
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