SPX Credit Spread Trader

So then we can do like those Jack Hershey journals.

"Welcome to the third version of the journal, please read version 1 and 2 in its entirety before starting to read this journal."

Pointless.

I think a condensed version of this journal as a Word document is the right way.

Quote from optiontraderman:

I have nothing against continuing the discussion. I just think the thread should be closed. It has too many pages and is just too big.

Someone can start up an Credit Spread 2 thread which can be a continuation maybe.

OTM
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lots of great nuggets buried in here. If I ever have time I would like to pick the good stuff out and condense it into a Word document but with all the side arguments, tangents and pics of JA, it will take some time lol...
 
Quote from optioncoach:

lots of great nuggets buried in here. If I ever have time I would like to pick the good stuff out and condense it into a Word document but with all the side arguments, tangents and pics of JA, it will take some time lol...
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Ya gotta save the pics of JA!
:D

Cru
 
IRS Cost Basis Question.

I was just looking at some JAN 2007 spreads that I put on around 12 Dec 2006 for good premium. I was SHOCKED when I looked at my trading balances to see that my current net spread credit was changed from the original .88 to its current ledger of .20. It was like subtracting out a huge amount of credit from my balances. So I went back to my confirmation statements etc. to confirm things. Then I noticed a flag note indicating that my "basis" was adjusted due to :

The cost basis information and acquisition date were adjusted to reflect the IRC Mark to Market requirement for Section 1256 Contracts. The new cost basis is based on the market value of the index option on December 31 of the previous year. See the IRS Publication 550 for more information.

I have never held options through a calendar year and this was a new thing to me. Apparently the brokerage adjusted the basis and now it makes hard to assess in real-time the risk-reward of holding the position through expiration. Further it looks like I have been "robbed" since my account balances look whacked.

Can anyone shed some light on "Mark to Market" mechanism and how they credit the account properly with the credits earned? I have what looks like a sure winning position but am confused as to which tax year (2006 or 2007) the realized credits will show up on and when I actually realize the credits.

Thanks,
TS
 
Quote from Crucis:

You think that hedging has that much affect?
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Only to the extent that a market decline will not be met with the same panic that was seen in 1987 - where many big players rushed to buy puts to hedge their portfolios.

Mark
 
Quote from TrendSailor:

IRS Cost Basis Question.

I have never held options through a calendar year and this was a new thing to me. Apparently the brokerage adjusted the basis and now it makes hard to assess in real-time the risk-reward of holding the position through expiration. Further it looks like I have been "robbed" since my account balances look whacked.

Risk/reward for holding is based on current value of spread, not original cost (I know I have said this before and others disagree).

Your account balance should be unchanged. No cash was removed.

Can anyone shed some light on "Mark to Market" mechanism and how they credit the account properly with the credits earned? I have what looks like a sure winning position but am confused as to which tax year (2006 or 2007) the realized credits will show up on and when I actually realize the credits.

Thanks,
TS

It no longer matters when you actually realize the profits. You are now taxed as if you had closed the position at year end and reopened it again - at the same year end prices, with no commissions. That's the way it works. Mark to the market merely means you pay taxes at year end based on the premise that the position was closed at those year end 'marks'. That's all. You will then pay lower taxes on your 2007 return to compensate for paying part of the taxes in 2006.

This is not complicated - you will figure it out in no time and you lost nothing.

Mark
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Quote from dagnyt:
This is not complicated - you will figure it out in no time and you lost nothing.

Mark

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Thanks Mark. I was hoping it was something like this. But it sure looked scary seeing that I have only a nickle left of unearned credit difference and my net possible take home is only a few thousand dollars. I was looking for over $10K more than I expected this week. Funny enough earning only a few $K in 2007 makes me not want to take early profits since it "Feels" like I need to earn that last nickel by holding through expiration lol.

So basically what you are saying is that the tax rules forced the broker to make me administratively realize most of my gain in 2006 (wishful thinking of them lol) and the residual balance must be earned in 2007. I suppose if it was losing on 31 Dec 2006 I would have been forced to take a 2006 loss on the position in 2006 and then offset it later in 2007 if I ended up making real money on it as I planned and expected.

I wish the brokers would give us a trading platform preference option to "disable" tax basis reporting. Since for trading purposes it would be easier to manage and "see" the reality of what is going on in the position independent of the tax accounting & reporting obligations and voodoo.

TS
 
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