Well, frankly, I have difficulty making sense of what I read.
It may be in part related to the fact that this is not my native language.
I will answer only a few things that I understood (about 40% of the post, and nothing of the "logic"), while for the rest, I collect below what I have not grasped.
So far I have understood you are working on some (legal) trading scheme for tax reduction which involves 2 accounting places. One "tax jurisdiction" (where you need to pay taxes) and, say, "Panama".
The general idea should be that there will be "created" apparent losses in the "tax jurisdiction", while they are compensated (for the same individual) by corresponding profits in another place, say "Panama".
So -
ideally - the trading activity should give
zero PnL overall, while the "losses" which will appear in the "tax jurisdiction" are, then, used to reduce the taxes paid by the individual, on profits coming from other activities.
right so far?
> I must not be exercised or everything goes up in smoke (tax and risk wise)
SPX is
cash-settled. No early exercise:
https://www.tastytrade.com/definitions/cash-settled#:~:text=The SPX index is cash,this index expires to cash.
[It would also be good to know why it is necessary, for the scheme to work, the use of the short options alone (which seems mandatory from what I read above), and not other instruments. How are the trades accounted for: are you using only the
realized? What is the "lot-matching" method, are you using
fifo, specific lot ?
https://guides.interactivebrokers.com/ibto/ibto/lotmatchingmethods.htm]
> Any other risks?
The overall "cost" of the options structure (the max final payoff of each strangle is going to be
negative of a few Ks, like around -
5K).
Spread. Liquidity issues, scattered quotes, difficulty of
execution in case of deep ITM (may resort to using futures + OTM option for remaining delta 100, using put-call parity, but it becomes a mess).
[In practice,
not viable at all IMHO with ITM options: in case, if it makes sense, might consider OTM for easier execution,
lower margins, and smaller spread. In any case, it may be often difficult to sell at extreme distances from the current underlying price: you will need to reduce the "flat" range of your payoff.]
Possibly flawed "logic": I have not clearly understood the idea so far.
Also, $$$ is tied in high
margins (which are also continuously varying with the underlying price and, possibly, broker policy changes). Almost
$70-80K just to maintain the strangle.
https://sensainvestments.com/options-margin-requirements/
_________________________________
what I did not understand:
Are we talking about 1 or 2 accounts? Are the 2 options both in 1 account? Or 1 leg in each of 2 distinct accounts, or 2 legs replicated in 2 accounts? Are the trades separated in time or space? What is the timing and place of the trades? Is the trading individual stationary in one place, or moving from one jurisdiction to another in time during the trading activity? What is the accounting method and order matching criterion?
(In general, I am not getting the "logic" and mechanism and why it should work)
>Market moves 2% Down
>BUY/CLOSE SPX PUT (Profit realised)
What profit? If the underlying price goes down you get a loss on the short put. Also, in any case, why are you talking of "realised profits"? Was it not the goal to realize losses in the "tax jurisdiction"?
> BUY CLOSE Put and CALL
When/where? are we talking of the same time? Same account?
> No rolling over needed if options run long enough (2 weeks to 4 months)
?
You need to provide a practical example with all details (with timestamps and places of executions and detailed accounting methods and order matching), or else it remains not really understandable. (In any case, as trading is concerned, IMHO it is
not going to be practically viable with those far-away ITM options.)
This is what the, temporally closest (expiry: 20230316), SPX CALL 2000 (
50% itm) looks like at this time of the day (9.42ET): around
$250-280 (or more) spread, and about $
39.8K margins for
1 short (double for the short strangle):
View attachment 300346
SPX OPT 20230316 2000 C CBOE S&P 500 Stock Index [SPX 230317C02000000, 531885043, mult: 100]
Venturing to work with this "monster", is probably asking for it
(Especially while there are other more comfortable ways to print $$$, and pay as little tax as possible, with negligible risk.)
