To capitalize on this commodities option strategy, your call
must meet certain criteria. First, the time to expiration should
be just beyond the commodities option one year ownership time
period. You need to get beyond the commodities option
period but not too much beyond so you are not tied into the
position longer than you have to be.
Remember, you are engaging in this commodities option strategy
because you want to sell the commodities option and close the
position, so you want to stay away from doing anything that
would keep you in the position longer than absolutely necessary.
Second, you would want to make sure the commodities option is
deep enough in the money, in two respects. First, the commodities
option must have a high delta, at least in the 90s, and second
- the strike price must be lower than what you perceive is the
lowest price the stock could reasonably go between now and the
commodities option expiration.
So, you decide to sell the January 2004, 60 strike calls for
$23.00. By doing this, you have ensured yourself of being able
to sell the commodities option at $60.00 and you have received
$23.00 to do so.
In effect, you have sold your commodities option at $83.00 without
selling your stock, as long as the stock stays above $60.00
by the expiration. This is because the buyer of the option will
naturally exercise your short call with the commodities option
above $60.00 forcing you to sell the stock to them. You then
sell your stock at $60.00 plus the $23.00 you received from
the sale of the commodities option.
Because this happens at January expiration, which is after the
one year time line, you now only have to pay long term capital
gains tax - instead of the much higher short term capital gains
You see what happens when the commodities option stays above
$60.00, but what happens when the commodities option trades
below $60.00? Below $60.00, the buyer of your call will not
exercise their call. Under those circumstances, you must sell
the commodities option yourself. You will realize whatever the
market price of the stock is at that time plus the $23.00 you
received from the sale of the call.
Another strategy that would provide you the protection you need,
while buying you the time you need would be a collar. A collar,
however, can cost you money because the collar involves the
trading of two commodities options, and therefore costs you
more in commissions.
When applying the collar strategy to this situation, make sure
you choose an expiration month that is beyond the one year time
period from the purchase date of your commodities option. Before
you make a final decision on selling a deep in-the-money call
to avoid short term capital gains tax, make sure you check out
the collar and compare its suitability against the call sale
strategy to see which is better for you.
As you can see from our example above, the sale of a deep in-the-money
call can buy enough time and protection for you to artificially
extend your commodities option
position with minimal risk. If
employed properly, the Tax Deferral Strategy can save you many
thousands of dollars in saved taxes. The next time you have
profits in a long stock position that youve had for nine months
or more, consider using this strategy to lock in your profits
and save money on your taxes.