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’Intentionally’ Generate Losses With Options ?
Old 01-26-2021, 04:36 PM   #1
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’Intentionally’ Generate Losses With Options ?

I just turned 59. (Single & Retired In 2015) & have to provide my own healthcare insurance through the exchange (ACA)
*I contribute the maximum to my HSA every year*

My income is very simple. $3,058.00 per month from a private sector pension, + dividends/capitol gains from a large taxable brokerage account at Fidelity.

Went over the healthcare income cliff ever so slightly in 2018 & paid the price.
To address this, during 2019, I sold some of those dividend paying entities, & my MAGI was comfortably below the cliff for that year.

Early in 2020 I made a ‘mistake’
I followed Warren Buffett's advice. “be greedy when others are fearful”
Bought a substantial amount of stock in a food company at blowout prices.
Worked great, but at the time of the buy, I didn't take into account the fact that the stock pays a handsome dividend.

Because of the additional dividends generated, I knew I’d be very close to going over the cliff again in 2020. My only loser is Kinder Morgan Energy KMI.
Sold enough of that to keep me below the cliff by approximately $1,500.00 for tax year 2020.

Another ‘problem’ arose late in 2020. In mid October, the company I retired from, announced that they're going to start paying dividends again. A minimum of $.20 per share per quarter in 2021. I own 800 shares in the aforementioned brokerage account, & another 1,574 that I purchased through the ESPP (employee stock purchase program) 2,374 shares with huge unrealized capital gains & all in taxable accounts.

At the very least, this will result in an additional $1,900.00 in dividends/income for 2021.

Like that episode of Seinfeld, I feel as if I'm living in bizarro world. A world where you get upset when your income rises, you wouldn't mind if your pension was cut slightly, & you hang onto losers like a rusty vice grip

With this additional income, I’ll almost certainly have to realize losses in KMI in 2021 & beyond. As I type, I still have -$10,824.47 in losses. At some point in the next 2, maybe 3 years, those losses will be depleted, & I'll only be 61.


I'm fairly familiar with options. Before I retired, I used them to generate extra income from blue chip stocks I held, by selling out of the money covered calls. I kept track of all of them, & over a 2.5 year period, I was in the black by around $12,500.00

My idea is to generate losses by purchasing ‘out of the money’ call options very close to the expiration date.
*Option losses are deductible*

Hypothetical example:

Let's say it's late in the year, I no longer have those losses in KMI to reduce income/write off, I know I'm going to be close to the income cliff, & need to realize approximately $300.00 in losses to assure I stay below it.

I'll use 3M Company (MMM) as an example (these screen caps are from yesterday) As you can see, shares closed at $170.39 & had additional gains in after hours trading $171.50

Below that, is a January call option with a strike price of 180 that expires this coming Friday, & closed @ $1.06 as you can see, that particular option was up 60.00% yesterday. Apparently someone was betting on 3M absolutely blowing away earnings today.

I (hypothetically) bought 3 contracts @ the close yesterday. 300 x $1.06 = $318.00

3M came out with positive earnings today, & shares closed up 5.56 @ $175.95
In spite of this, the option in question closed @ $.70 down $.36 (-33.96%)
This is because of time decay.

My thinking is that 3M will probably trade sideways for the rest of the week, my hypothetical 3 contracts will expire worthless, & I’d have a short term loss of $318.00

Correct ?
"No beast so fierce but knows some touch of pity, but I know none, therefore am no beast"
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Old 01-26-2021, 05:24 PM   #2
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The part on buying an out-of-the-money option just before expiry makes sense to me.

Sort of like pay $318 to keep your APTCs.
If something cannot endure laughter.... it cannot endure.
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Old 01-27-2021, 01:24 PM   #3
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Originally Posted by pb4uski View Post
The part on buying an out-of-the-money option just before expiry makes sense to me.
It made sense to me as well, until today!
Here's the option that I hypothetically bought @ $1.06 on Monday, in the hopes of losing money!

It really is bizarro world!
"No beast so fierce but knows some touch of pity, but I know none, therefore am no beast"
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