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Let’s say I have 100 shares of XYZ, and over the past 9 months the share price has increased 20%. I don’t want to sell until the 12 month mark so I can benefit from a long term capital gains rate, but I want to lock in my current profit.

What options strategy can I use to accomplish this?

EDIT: Using American-style options. XYZ trading on NYSE.

  • Awesome question. It surely will involve going long on put options, but I'm interested to see whether the answers suggest at-the-money, in, or out... or maybe pairing it with selling a call to pay for the put. – Ben Voigt Oct 6 '18 at 1:09
  • Also, can you specify the exchange? Whether you have access to Euro-style options (exercise only at expiration) or American-style (exercise any time up to expiration) will probably be important. – Ben Voigt Oct 6 '18 at 1:12
  • @Ben Voigt - An OTM protective put has a larger 'give back' should share price drop (distance to strike plus premium paid). In successive order, an ATM and an ITM protective put have lower and lower 'give back' amounts should XYZ drop and higher and higher BE points should XYZ rise because the put costs more as the strike price increases. Selling a short call to fund the cost of put (a long stock collar) runs the risk of losing the stock. The big fly in the ointment is tax law (see my Answer). – Bob Baerker Oct 6 '18 at 2:20
  • @BobBaerker: I look forward to your answer (can't see it yet) – Ben Voigt Oct 6 '18 at 2:22
  • LOL. You don't know how to read my mind??? ;->) Serving it up shortly. – Bob Baerker Oct 6 '18 at 2:24
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It's a simple answer until you throw the 12 month barrier into the mix. Per Fidelity:

“Protective puts” and “married puts” involve the same combination of long stock and long puts on a share-for-share basis, but the names imply a difference in timing of when the puts are purchased.

A “married put” implies that stock and puts are purchased at the same time, and married puts do not affect the holding period of the stock.

If a stock is held for more than one year before it is sold, then long-term rates apply, regardless of whether the put was sold at a profit or loss or expired worthless.

Per the CBOE:

How are protective puts taxed?

If your position in the stock is not eligible for long-term capital gains treatment and you purchase a protective put, your holding period is eliminated. Unfortunately, your holding period will not restart until the put is disposed. However, a put purchase will not affect your holding period if either:

The stock is already eligible for long-term capital gains treatment

The put is “married” to the stock purchase

In either scenario, Qualified Dividend Income (QDI) is forfeited while the put is in place.

  • Please be aware of the fact that tax laws and regulations can change and are subject to varying interpretations. Investors should consult with tax advisors for up-to-date tax advice applying to their particular investments.

To further complicate matters, while the married put is exempted from the short-sale rules, it remains unclear whether or not the married put is also exempt from the offsetting position rules (this does not apply to your situation).

So unless you drop the requirement to reach the 12 month mark, there's no solution that I know of.

  • Thanks for the thorough answer, Bob. I didn't know that protective puts eliminate your holding period. I'll give this another day or two to see if anyone comes up with a solution, and if not, will mark your answer as correct. – cph2117 Oct 7 '18 at 18:18
  • If you're willing to give up the 12 month requirement, you can buy a protective put. If you're willing to give up the stock at a higher price, you can eliminate some/most/all of the cost of the put by collaring the stock (sell covered call and use proceeds to buy the put). There might be something of interest in a post I made last week: money.stackexchange.com/questions/100515/… – Bob Baerker Oct 7 '18 at 18:55

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