Personal Finance & Money Asked by C K on February 26, 2021
Let’s take these hypothetical trades
Through Dec-31-2020 I continue to hold both the positions.
I thought Downside protection and upside limitation influence whether this would be considered a constructive sale.
I am avoiding the downside risk through the short call.
On the upside, technically I am not giving up the upside. At expiry AAPL might close above $110+$50=$160. And my final gain is $30+$10.
Does this make it appropriate to be reported in 2022 taxes, rather than 2020 taxes?
Option tax law is contradictory and not well defined so I'll take a pass on the issue of constructive sales. So I'll just comment on the trade.
You wrote that it's a hypothetical trade. You made these numbers up for the purpose of discussing the constructive sale? (The premiums aren't realistic).
I am avoiding the downside risk through the short call. On the upside, technically I am not giving up the upside.
Converting a long call to a vertical spread is indeed "giving up the upside". Selling the $110 call gave up all but $5 of the upside.
At expiry AAPL might close above $110+$50=$160. And my final gain is $30+$10.
Before you converted the $100c to a vertical, you had a $25 gain on it. By selling the $110c, you mitigated $50 of that $55 risk and the worst that could happen would be giving back only $5.
You made an error on your profit calculation. You paid $30 for your 100c and sold your 110c for $50. That's a $20 credit. The spread has the potential to make $10 so you maximum profit is $30 (not $40).
Summary? When you had a $25 gain, you converted to a spread that has $5 of risk and $5 of gain and the expiration is January of 2022. I don't see 15 months for $5 as worthwhile.
Answered by Bob Baerker on February 26, 2021
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