buying stocks vs. options for short term trading

[sle]

I believe that qualifies as a wash sale. For a wash sale the irs looks at options with the same cusip as the underlying.

That was my belief too, but @ET180 is stating otherwise.

 

[newwurldmn]

That was my belief too, but @ET180 is stating otherwise.

I tried to delete my post after reading up in the thread.

He might be right because shorts are marked by the cover date, not the initial short. I will ask my accountants and see what they say.

 

[ET180]

I believe, based on what my accountant told me, that they are viewed as two separate instruments. The key is that I closed the position and booked a loss. I won't acquire the stock again until after the wash sale window has closed. There are many other ways to get around the wash sale rule (such as sell an ETF like XBI and buy the same number of shares of IBB, close VDE, buy XLE, etc). The ETFs are almost identical, but no wash sale because they are not the same instrument. This isn't some hidden or uncommon practice either, robo-investment products such as wealthfront advertise this practice as one of the advantages of their investment algorithm:

Tax-loss harvesting is a way to make an investment portfolio work even harder – not just in generating investment returns, but by also generating tax savings.

Tax-loss harvesting (TLH) works by taking advantage of investments that have declined in value, which is a common occurrence in broadly diversified investment portfolios. By selling investments that have declined below their purchase price, a tax loss is generated – which can be used offset other taxable items, thus lowering the investor’s taxes.

What’s more, any investment sold in this manner can be replaced with a highly correlated alternate investment, such that the risk and return profile of the portfolio remains unchanged, even as tax savings are created. These tax savings can even be reinvested to further grow the value of the portfolio.

https://research.wealthfront.com/whitepapers/tax-loss-harvesting/

 

[newwurldmn]

I believe, based on what my accountant told me, that they are viewed as two separate instruments. The key is that I closed the position and booked a loss. I won't acquire the stock again until after the wash sale window has closed. There are many other ways to get around the wash sale rule (such as sell an ETF like XBI and buy the same number of shares of IBB, close VDE, buy XLE, etc). The ETFs are almost identical, but no wash sale because they are not the same instrument. This isn't some hidden or uncommon practice either, robo-investment products such as wealthfront advertise this practice as one of the advantages of their investment algorithm:



https://research.wealthfront.com/whitepapers/tax-loss-harvesting/

I think your idea definitely works on ETFs (that are similar but strictly different). I am not sure it works on options of the same underlying.

 

[beerntrading]

I think your idea definitely works on ETFs (that are similar but strictly different). I am not sure it works on options of the same underlying.

That's what I'm saying the law is explicit about.

I heard descriptions as strict as two ETFs not even working if they have some common constituent. Or that selling a stock within an ETF that you also purchase during the same 30 day period.

Moot point though. Every description I have ever read is that buying or selling to close for a loss and then buying or selling to open a new position in the same symbol or its options during the 30 days prior or after is considered a wash sale.

And @ET180, I'd definitely get a second opinion on that one before you go and file. No matter who gave the advice, you're holding the bag if they're wrong.

 

[srinir]

http://www.tradelogsoftware.com/resources/wash-sales/

"
Wash Sales

You cannot deduct losses from sales or trades of stock or securities in a wash sale unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities. A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

1. Buy substantially identical stock or securities,
2. Acquire substantially identical stock or securities in a fully taxable trade,
3. Acquire a contract or option to buy substantially identical stock or securities, or
4. Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.

This means that if you close a trade at a loss and then buy back the same, or "substantially" the same equity such as an option on that equity, you cannot take the loss at that time. According to the IRS, the loss now has to move forward and has to be attached to the cost basis of the trade in which you bought back the same equity."


I interpret acquiring as the intent to buy now. It doesn't matter it will be put to you some time later after 30 days.

 

[ET180]

I pulled up my IB year to date realized and unrealized account statement. For the positions that I sold both stocks and puts, it shows a realized long-term loss with no adjustments for a wash sale. For the corresponding ITM puts that I shorted, it only shows a small unrealized gain or loss corresponding to the change in value since I put on the trade. I don't see any other adjustments, but I have noticed adjustments for other wash sales in the past (where I sold a stock through short call assignment and then acquired it a week or two later via short put assignment assignment).

Regarding these wash sale rules:

1. Buy substantially identical stock or securities,
2. Acquire substantially identical stock or securities in a fully taxable trade,
3. Acquire a contract or option to buy substantially identical stock or securities, or
4. Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.

Technically, I don't think I have met any of those conditions because I have not bought anything. I shorted. And even at this point, it's not known that I will even acquire the stock. If I'm lucky and the underlying increases in value enough by expiration, then there will be no assignment.

 

[ironchef]

There is no point to selling covered calls. The R/R is EXACTLY the same as naked puts at same strike. A covered call is also a synthetic short put. You should do better on the naked puts because of 1) lower commissions 2) easier to close out a trade with only a single instrument 3) less slippage.

Only reason for covered calls is - Put spread is too wide at that strike, but normally that's a problem on the call side because on CC's you trade ITM, whereas the naked put is OTM.

I don't do short put when all my trading assets are tied up in stocks.

 

[newwurldmn]

There is no point to selling covered calls. The R/R is EXACTLY the same as naked puts at same strike. A covered call is also a synthetic short put. You should do better on the naked puts because of 1) lower commissions 2) easier to close out a trade with only a single instrument 3) less slippage.

Only reason for covered calls is - Put spread is too wide at that strike, but normally that's a problem on the call side because on CC's you trade ITM, whereas the naked put is OTM.

The stock part of a covered call can potentially be treated as long term capital gains.

For American options on dividend paying stocks, covered calls and puts are not strictly equivalent.

 

[spindr0]

That's true for non-portfolio margin accounts. The buying power reduction on a short naked put is less than the buying power reduction on owning 100 shares of the underlying. I think the difference is around 5:1 depending on the broker.

Margin for a short ATM equity option is approximately 20% so for Reg T, the ratio is about 5:2 (brokers have the right to be more restrictive)

I recently did some tax loss harvesting on a few of my positions by selling shares at a loss and subsequently shorting equivalent number of puts at my break even expiring sometime next year. This provides me with 2 advantages - generating losses to offset gains to reduce tax liability this year and 2) allow me to earn additional interest on my credit balance.

IRS rules are often vague and misleading (IRS Pub 550) and this issue of options and wash sales is no different.

I'd suggest that you research this further. Check out IRS Ruling 85-87 which states that if you sell stock at a loss and sell a put option within 30 days, the sale of the put option "COULD" trigger the wash sale rule. "COULD" is related to whether the put is "likely to be exercised." Phrases like "likely to be exercised" are where we get into trouble.

I'm not a tax expert but my two cents is that the short put sale triggers a wash sale violation.