How to create capital loss with options (or otherwise)

[SumZero]

OP may want to postpone tax payment. Some countries allow it if one produces a capital loss.

Is it illegal to be long in ES futures and short on same ES using a sintetic (shorting ES call and buying ES put, same ITM strike, same maturity) ?

This can easily create the capital losses without almost any risk, closing the losing position and reopening it a couple of seconds after. Loss is realized, profit is not realized. And positions are always symmetric so no risk.
Cost of this is just a couple of commissions and some bid/ask spread.

Does this violates any kind of exchanges/regulators rule ?

Another alternative is 2 different brokerage accounts and being long in a currency pair in account 1 and short in the the same pair in account 2. When capital loss is achieved, just close and reopen the losing position, producing the loss. Forex is deregulated so I guess this doesn't violate anything.

Of course tax abuse is always something to consider but there are countries not enough sophisticated to catch this.

 

[Sig]

OP may want to postpone tax payment. Some countries allow it if one produces a capital loss.

Is it illegal to be long in ES futures and short on same ES using a sintetic (shorting ES call and buying ES put, same ITM strike, same maturity) ?

This can easily create the capital losses without almost any risk, closing the losing position and reopening it a couple of seconds after. Loss is realized, profit is not realized. And positions are always symmetric so no risk.
Cost of this is just a couple of commissions and some bid/ask spread.

Does this violates any kind of exchanges/regulators rule ?

Another alternative is 2 different brokerage accounts and being long in a currency pair in account 1 and short in the the same pair in account 2. When capital loss is achieved, just close and reopen the losing position, producing the loss. Forex is deregulated so I guess this doesn't violate anything.

Of course tax abuse is always something to consider but there are countries not enough sophisticated to catch this.

Nothing illegal in the first instance even in the U.S., you just obviously won't get the tax benefit in the U.S. You'll lose money on the second one because the roll rate is set up so that you always get a haircut if you're holding two opposite positions, if you're talking bucket shop brokers.

 

[bpj]

OP may want to postpone tax payment. Some countries allow it if one produces a capital loss.

Is it illegal to be long in ES futures and short on same ES using a sintetic (shorting ES call and buying ES put, same ITM strike, same maturity) ?

Sorry for the trouble but would you be so kind to elaborate more on this so that it is easier to grasp?

 

[bpj]

OK, it is better to use an example:
- long ES @ 2997; long put 3000 short call 3000
- underlying falls to 2900
- close long ES @ 2900 -> loss of 97 points
- reopen long ES @ 2900
- in the new tax year:
- underlying falls to 2800
- close long ES @ 2800 -> loss of 197 points
- close long put -> gain of approx. 200 points.

Cons:
- large spread, little liquidity in ES options
- requires approx. full ES margin x 2 (I guess there will be little margin credit at most FCMs)
- if the synthetic futures position is a loser it entails closing it out at a loss and re-establishing the position - all in a low-liquidity market

Pros:
- can be done in the same account as opposed to the opposite positions in FX at two different brokerages

Another idea: futures on the same underlying on different exchanges. Can someone suggest the best pair of instruments?

 

[SumZero]

Another possibility is to use the same futures contract, but different maturity (and simetric positions).

On ES Dec 19 contract the spread bid /ask is, as usually, 0.25.
On ES Mar 20 contract the spread bid /ask is 0.75 (so a bit worse and liquidity is still scarse at this time)

Or you could use the same maturity (no liquidity issues) but use the ES and MES
ES = 10xMES so you can use December contracts on both but 10x bigger positions in MES.
Commissions are proportionally higher in MES (they are not 10 times lower).

You will always have, of course, some cost (either in spread, in commision or both) to create the loss and / or issues with margin. I guess you are prepared to pay something to be able to save a lot more in taxes (or postpone the payment).

 

[bpj]

Thank you, I think ES + MES is the way to go. Do you happen to know what the SPAN margin might be for a long 1 ES vs short 10 MES position?

 

[Overnight]

Thank you, I think ES + MES is the way to go. Do you happen to know what the SPAN margin might be for a long 1 ES vs short 10 MES position?

This was already answered in another thread, made by you I believe. There is no intermarket credit for that position at the CME at this time.

 

[bpj]

In view of the practical aspects of each strategy proposed here the winner must be CL calendar spreads. I have done some more research into it and it seems the practical implementation could go like this:
- short Dec + long Jan (margin approx. 75 USD)
- long Feb + short Mar (margin approx. 75 USD)
All legs at equal weights (1:1:1:1). This should give you a hedged calendar spread position, albeit in different calendar months.
Enter the above positions well in advance of tax year-end to allow for the market to make a big enough move one way or the other - assume a fixed closing time (say last week of Dec) beforehand. The size should be dictated by the historical volatility, e.g. if you initiate the strategy beginning of Dec - you can expect the market to move at least $3.00 which will create a loss of $3,000 per contract. If you want to create a tax loss of $30,000 you need 10 lots.

When you close out the "losing" leg in Dec-Jan pair, add to the opposite direction in the Feb-Mar pair, e.g. if you close out short Dec, add to short Mar, so that you have: 1 long Jan + 1 long Feb + 2 short Mar (margin of approx. 425 USD). Now you are exposed to spread movements, so ideally you want to run this position only a short time - which suggests the close-out of the "losing" leg should occur ideally on 31 Dec.

With the above, you do not know what tax loss you will get as the market may come back to your opening price in the last week of Dec. On the other hand, it is virtually impossible to make a big real loss as your spread position is hedged most of the time. You have to pay more in commissions but the margin you have to put up is very low. Pros and cons, as always.

What do you think of it?

 

[bpj]

Correction:
pairs and margins should read:
short Feb - long Mar 150 USD
long Apr - short May 150 USD

long Mar - short May 275 USD

After having added to short May (to keep the margin and underlying price risk low) one should reopen the short Feb leg, closing out the short May contracts added earlier, hence getting back to the original position -> hedged calendar spread. Or, in case of having enough margin, skip adding to the May leg part and just reopen closed Feb leg.

This way one could close out the position at a pre-defined loss level, instead of waiting till the last week of December.