Tax harvesting of worthless options

[spindr0]

Close the atm before end of the year. “Like kind” for wash sales is a bit vague.

I'm not really sure what you're asking or telling me but rather than guessing, here's the summary of the sequence on one position closed:

Worthless zero bid on long $62.50 puts expiring Jan 20th. Tried selling them for 1 cent for several days. No takers. Traded out via a calendar:

STC 1/20 62.50p / BTO 12/27 $85p for 34 cents

Immediately STC 12/27 $85p for 32 cents

Loss of 2 cents and tax harvesting completed. All options gone. Gubbermint gets less. Clear as mud?

 

[d0rian]

I run into this a lot when I need to get out of options that have no bid. Depending on the option, you may not be able to sell a vertical for even zero.

The key is to pair it with a liquid option. So say you are long the BA Jan 2020 135 puts. There is no way you can sell these for even .01. So what I will do is pair it with another option I need to buy. For example if I want to buy the Jan 2021 150 puts, instead of simply buying them, I will put a spread in to buy the 150 puts and sell the Jan 2020 135 puts. This will get me out of my longs and I will be in the 2021 puts. Additionally when I do this I will often get a better fill then if I buy the puts outright, as it will go into the spread book.

Do you mind expanding on this a little, as I'm not sure I understand the mechanics here. If you're unable to sell the worthless $135 Puts that you're Long outright, even for $0.01, how does submitting it as part of a spread get around that? Isn't a Buying counterparty still required here?

 

[FSU]

Do you mind expanding on this a little, as I'm not sure I understand the mechanics here. If you're unable to sell the worthless $135 Puts that you're Long outright, even for $0.01, how does submitting it as part of a spread get around that? Isn't a Buying counterparty still required here?

So say you are long the 135 puts that you want off your sheets. They are at .01 and you can't sell them. If you wanted to buy next months 135 puts, you could use them to get out of your worthless ones. Say next months puts are .09 -.12, but if you put a .11 bid in you would be filled. Instead of buying them outright you would do a spread, where you buy next months and sell this months for .11 (buying next months for .12 and selling this months for .01) You are essentially selling your long puts out for zero. You have paid an extra .01 for next month's put in order to sell this months for .01 (when they are worth zero.)

This will create some extra commissions, but it will allow you to get the worthless options off your sheets for no other extra cost or profit. Market Maker is still happy as they are able to sell next months puts for the price they wanted, they just get another put on their sheets for zero cost.

 

[d0rian]

So say you are long the 135 puts that you want off your sheets. They are at .01 and you can't sell them. If you wanted to buy next months 135 puts, you could use them to get out of your worthless ones. Say next months puts are .09 -.12, but if you put a .11 bid in you would be filled. Instead of buying them outright you would do a spread, where you buy next months and sell this months for .11 (buying next months for .12 and selling this months for .01) You are essentially selling your long puts out for zero. You have paid an extra .01 for next month's put in order to sell this months for .01 (when they are worth zero.)

This will create some extra commissions, but it will allow you to get the worthless options off your sheets for no other extra cost or profit. Market Maker is still happy as they are able to sell next months puts for the price they wanted, they just get another put on their sheets for zero cost.

Thanks for this reply. I don't trade spreads so I didn't know the type of mechanism you're describing even existed -- I understand, of course, that the MM/counterparty is happy to take the hypothetical $0.11 net in your example (since he would have hit a naked $0.11 Bid regardless, so ends up in the same spot but with a couple extra lottery ticket Puts)...I guess I just find it odd that a 'hack' like this is even required; why is that? I.e. wouldn't it be cleaner for all parties to simply allow a party wanting to get off a position to essentially "abandon" a position / sell it to the first taker for $0.00? (a cabinet trade? E.g. wouldn't the MM in your example -- or any MM for that matter -- be more than happy to just scoop up those unwanted lottery ticket Puts for free?)

 

[FSU]

Thanks for this reply. I don't trade spreads so I didn't know the type of mechanism you're describing even existed -- I understand, of course, that the MM/counterparty is happy to take the hypothetical $0.11 net in your example (since he would have hit a naked $0.11 Bid regardless, so ends up in the same spot but with a couple extra lottery ticket Puts)...I guess I just find it odd that a 'hack' like this is even required; why is that? I.e. wouldn't it be cleaner for all parties to simply allow a party wanting to get off a position to essentially "abandon" a position / sell it to the first taker for $0.00? (a cabinet trade? E.g. wouldn't the MM in your example -- or any MM for that matter -- be more than happy to just scoop up those unwanted lottery ticket Puts for free?)

There has to be a price on the option. You can't trade it for zero. A cabinet trade is the same as .01, so the market maker would still be paying .01 plus commissions.

 

[d0rian]

There has to be a price on the option. You can't trade it for zero. A cabinet trade is the same as .01, so the market maker would still be paying .01 plus commissions.

Got it. The other aspect I was unclear about was re: you writing "Additionally when I do this I will often get a better fill then if I buy the puts outright, as it will go into the spread book." I was unaware that there was a 'separate' spread book (if I'm understanding correctly). I'm sure these are noob questions, but why would you get a better fill (presumably on your non-worthless spread leg) if your order goes to the spread book? I was under the impression that when trading spreads, you're essentially just submitting 2 independent legs with a condition that they must get filled simultaneously...IOW there's no requirement they both get filled by the same counterparty (which you should ofc be indifferent to). But your reference to the (separate?) 'spread book' suggests that it'll be the same counterparty on the other side of both legs (and...in fact, I suppose that would be a requirement in order for the 'hack' to work since it'd be the only way for your hypothetical MM to get his $0.11 net).

 

[FSU]

When you submit a spread, a multi legged option order, it will generally be submitted to an exchanges COB (complex order book). They are exchange specific. Here the order is filled as a spread by the same contra party. You generally will get a better fill here then legging a spread yourself. For example if you wanted to do a butterfly, the "market" in the COB may only be .10 wide, even if the market on each individual option is .40 wide.

What I mentioned is sometimes you may get a better fill if you pair your order with a worthless option in order to send it into the COB as a spread. For example a leap put might have a wide market, 2 -4. If I want to sell one of these options, instead of just putting an offer in, I might create a spread where I sell the leap put and buy a front month put for .01. Sometimes this will yield a higher net price then simply selling the leap put outright.

The CBOE used to let you see all the orders in each stocks COB on there web site for free, but no longer. You will now need to pay for the data.

 

[Borderite]

It's that time of year again, and found myself in this position. Realized that even easier than a placing calendar trade and then liquidating the other leg, is to just roll the options backward to before the year end, at lowest strike offered. Single trade and you're done, the new options will expire before year end, and avoids risk of price sinking before you can liquidate.